Exam 17: International Capital Structure and the Cost of Capital

The discount rates to use for the APV calculations are:

Desert Inc.is a Spanish producer of barrels and is considering the establishment of a subsidiary in China.The projected time horizon for the project is 2 years.Management wants to set up the production facilities,get them running and then sell the facilities after 2 years.The current exchange rate is renminbi 11/euro.The renminbi is pegged to the US dollar at an exchange rate of renminbi 8.28/$ and the peg is expected to stay unchanged over the next two years.The expected inflation rates for the next two years are given below: Forecast the exchanges rates between the renminbi and the euro for the next two years.Justify your forecast.

The ABC Company,a U.S.based MNC,plans to establish a subsidiary in Ecuador to manufacture and sell water pumps.ABC has total assets of $80 million,of which $60 million is equity financed.The remainder is financed with debt.ABC considers its current capital structure optimal.The construction cost of the facility in Ecuador is estimated to be ECS8,500 million,of which ECS6,500 million is to be financed at a below-market rate of interest arranged by the Ecuador's government.The proposed project will increase the borrowing capacity by:

White Rock Inc.located in British Columbia makes moccasins marketed mostly to tourists.The firm would like to take advantage of lower labour costs in Turkey and is considering the establishment of a foreign operation in Turkey.The current exchange rate is Lira 1,000,000/C$.Management predicts the following for the next two years for the Turkish subsidiary: All cash flows are in current liras.Determine the Canadian dollar revenues for the next two years.

When making a capital budgeting decision the ultimate decision depends on