Exam 18: International Capital Budgeting

The required return on equity for an all-equity firm is 10.0%.They currently have a beta of one and the risk-free rate is 5% and the market risk premium is 5%.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the beta if this firm changes capital structure.

What is the NPV of the project using the APV methodology?

The CFO who has a CFA notices the optionality in starting this project today.He asks you to comment and outline your valuation strategy.

What is the NPV of the project using the WACC methodology?

Using your results to the last question,make a recommendation vis-à-vis when to undertake the project.

Repeat the above project analysis assuming that the Irish firm could replicate the project in Ireland.(i.e.cash flow out the project in Ireland and find break-even price (in €),quantity,NPV,IRR (in euro not dollars).

What is the levered after-tax incremental cash flow for year 4?

What is the levered after-tax incremental cash flow for year 0?

When using the APV methodology,what is the NPV of the interest tax shield?

What is the levered after-tax incremental cash flow for year 1?

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the firm's cost of equity capital?

Your firm's existing bonds trade with a yield to maturity of eight percent.The state of Missouri has offered to loan your firm $10,000,000 at zero percent for five years.Repayment will be of the form of $2,000,000 per year for five years,the first payment is due in one year.What is the value of this offer?

What is the unlevered after-tax incremental cash flow for year 0?

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent. -Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8%.What is the APV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

An Italian firm is considering selling its line of coin-operated cappuccino machines in the U.K.The business risk will be identical to the firm's existing line of business in the euro zone,the cost of capital in the euro zone is i_€ = 10%.The expected inflation rate over the next two years in the U.K.is 3% per year and 2% per year in the euro zone.The spot exchange rates are $1.80 = £1.00 and $1.15 = €1.00. The pound sterling denominated cash flows are as follows: What is the €-denominated NPV of this project? I did not round my intermediate steps,if you did,select the answer closest to yours.

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to

Perhaps the most important decisions that confront the financial manager are

Using the flow to equity methodology,what is the value of the equity claim?

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the required return on assets?