Luther Industries,a U

Luther Industries,a U.S.firm,is considering an investment in Japan.The dollar cost of equity for Luther is 12%.The risk-free interest rates on dollars and yen are r_$ = 5.5% and r_¥ = 1.5% respectively.Luther industries is willing to assume that capital markets are internationally integrated.Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates.The yen cost of equity for Luther Industries is closest to:

A) 14.0%
B) 12.3%
C) 7.8%
D) 18.5%

Correct Answer:

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