Locating an Automobile Plant
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China is a manufacturing superpower. Assume that you are CFO of an automobile manufacturer looking to build a $U.S.800 million plant in China. You are discussing this project with your spouse, who is intelligent, but has no background in finance.
1. Your discussion should begin with a clear and logical step-by-step explanation of the theory behind the concept of "required return" on proposed capital investments. Explain how cost of equity, cost of debt, WACC, and allowances for various risk factors are involved in determining the "required return" on proposed international capital investments.
2. Discuss each of the main risk factors that should be allowed for in addition to WACC in order to determine the appropriate required return on this capital investment opportunity.
3. Make a reasonable estimate of the required return, starting with a 12% weighted average cost of capital for the U.S. auto manufacturer, and adding reasonable estimated percentages for each of the separate risk elements you can foresee.
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China is a manufacturing superpower. Assume that you are CFO of an automobile manufacturer looking to build a $U.S.800 million plant in China. You are discussing this project with your spouse, who is intelligent, but has no background in finance.
1. Your discussion should begin with a clear and logical step-by-step explanation of the theory behind the concept of "required return" on proposed capital investments. Explain how cost of equity, cost of debt, WACC, and allowances for various risk factors are involved in determining the "required return" on proposed international capital investments.
Answer: Required return is a very important concept in finance. It tells us by what factor we need to discount the future cash flows that we will be receiving in the future. The higher the required return, the lower will be the present value of cash flows.
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