MNC’s cost of Capital Newark Co. is based in the United States. Approximately 30 percent of its sales are from exports to Portugal, and the company has no other international business. It finances its operations with 40 percent equity and 60 percent dollar-denominated debt. Newark borrows its funds from a U.S. bank at an interest rate of 9 percent per year. The long-term risk-free rate in the United States is 6 percent, whereas the long-term risk-free rate in Portugal is 11 percent. The stock market return in the United States is expected to be 13 percent annually. Newark’s stock price typically moves in the same direction and by the same degree as the U.S. stock market. Its earnings are subject to a 20 percent corporate tax rate. Estimate the cost of capital to Newark Co.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 17, Problem 28QA
Textbook Problem

MNC’s cost of Capital Newark Co. is based in the United States. Approximately 30 percent of its sales are from exports to Portugal, and the company has no other international business. It finances its operations with 40 percent equity and 60 percent dollar-denominated debt. Newark borrows its funds from a U.S. bank at an interest rate of 9 percent per year. The long-term risk-free rate in the United States is 6 percent, whereas the long-term risk-free rate in Portugal is 11 percent. The stock market return in the United States is expected to be 13 percent annually. Newark’s stock price typically moves in the same direction and by the same degree as the U.S. stock market. Its earnings are subject to a 20 percent corporate tax rate. Estimate the cost of capital to Newark Co.

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