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International Finance, Cost of Capital

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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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Solution Preview

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

Answer: A) debt

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

Answer: C)  Apple stock on the London exchange

The cost of equity capital can be lowered by raising capital in international capital market instead of domestic capital market.
Apple is from US and it is raising funds in this case in the UK. Both Microsoft and Toyota are raising funds in home country ...

Solution Summary

Answers Multiple Choice Questions in International Finance, Cost of Capital.

$2.19
See Also This Related BrainMass Solution

Finance: Capital Budget Process

Need to see step by step equation solutions.

Data:

rd= 10%
T= 40%
FX1= 96.57 ¥
FX0= 95.72 ¥
Dps= 139.19 ¥ per share, selling at 1,000 ¥ per share; the underwriting cost is 7%, or 70 ¥
Pn= 930 ¥
Original Bond Yield: 12%
Risk Premium: 1.5%
rRF= 5%
RPM= 6.5%
bi= 1.75
RPW= 3.83%
biW= 1.44
n = 3 years
CF1= -300,425 ¥
CF2= -60,190 ¥
CF3= 210,515 ¥
Inventory Increases = 455,000 ¥
A/R Increases = 890,000 ¥
A/P & Current Liabilities Increases = 1,375,000 ¥
Net Operating Profits = 12,565,235 ¥
Net Fixed Assets = 11,730, 275 ¥
NOCF3= 70,165 ¥
g = 185%
S3= 90,175 ¥
Fixed Costs = 845,000 ¥
Variable Costs per Unit = 55 ¥
P = 110 ¥
BE = 10425 Units
Payback Period = 2.35 Years

Questions:
1.Calculate the After Tax Cost of Debt for a domestic-only company

2.Calculate the After Tax Cost of Debt for an internationally-based company with debt denominated in a foreign currency

3.Compare & Contrast the Cost of debt for a domestic-based with an international-based company. What do the numbers tell you about doing business internationally as opposed to domestically?

4.Calculate the Cost of Preferred Stock

5.Calculate the Cost of Equity using the Company Bond Yield, Risk Premium Approach, then calculate the Cost of Equity using the [domestic-only] CAPM, and then calculate the Cost of Equity using the Global CAPM

6.Contrasting & comparing the three values for the cost of equity should provide insight into the accuracy of forecasting & valuating the companyâ??s equity. What are those insights?

7.Calculate the Weighted Average Cost of Capital using both the domestic-only and then the international-based CAPM. (Use the little chart I made for you in the Capital Budget Process document. Itâ??s easier to organize the work this way.)

8.Calculate the NPV and IRR for this project.

9.Calculate the Net Operating Working Capital, Free Cash Flow, and salvage value for the project.

10.Calculate the break-even point for this project. Then, if the company were to set the break-even point, and wanted to know at what price they should set the commodity to achieve that break-even point, calculate the price at the company-set break-even point. If the industry average units per year manufactured is 5,000 units annually, is this an efficient operation? Why or why not?

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