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Comparison to Parents WACC for corporate wide debt/equity ratio

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1. A firm with a corporate wide debt/equity ratio of 1:2, an after tax cost of debt of 7 percent, and a cost of equity capital of 15 percent is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required return on equity is estimated to be about 12 percent. The after tax cost of debt is expected to remain at 7 percent.

a. What is the project's weighted average cost of capital? How does it compare with the parent's WACC?

b. If the project's equity beta is 1.21, what is its unlevered beta?

Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of ?200,000 in three months. On June1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell ?200,000 forward in three months.The spot rate of the euro on September 1 is $1.15. Graylon will receive $_________ for the euros.

A) 224,000
B) 220,000
C) 200,000
D) 230,000

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Solution Summary

The project's weighted average cost of capital and WACC is determined for a company. The equity beta and unlevered beta is determined.

$2.19
See Also This Related BrainMass Solution

Multiple Choice Questions in International Finance, Cost of Capital: securities, cost of equity capital, Insurance for political risk, premium, WACC

44. The most preferred form of securities for funding by firms in the U.S. is
A) debt
B) preferred stock
C) common stock
D) stock derivatives

47. Which one of the following new issues of stock has the greatest probability of lowering its cost of equity capital?
A) Microsoft in the New York markets
B) Toyota on the Tokyo exchange
C) Apple stock on the London exchange
D) all of the above

60. Insurance for political risk exists. How would you incorporate the insurance premium into the capital budgeting process?

A) Subtract the insurance premium from the expected cash flows from the project when computing its NPV
B) Raise the cost of capital (discount rate)
C) Adjust the NPV downward by a subjective amount.
D) None of the above.

63. A firm with a corporate wide debt/equity ratio of 1:2, an after tax cost of debt of 7 percent, and a cost of equity capital of 15 percent is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required return on equity is estimated to be about 12 percent. The after tax cost of debt is expected to remain at 7 percent.

a. What is the project's weighted average cost of capital? How does it compare with the parent's WACC?

b. If the project's equity beta is 1.21, what is its unlevered beta?

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