International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.40%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.50%. The expected return on the market portfolio is 8.20%. The company's effective tax rate is 30%. Its optimal capital structure is 55% debt and 45% equity.
a. If Thunderhorse's beta is estimated at 1.80, what is Thunderhorse's weighted average cost of capital?
b. If Thunderhorse's beta is estimated at 1.50 , significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital?
a) An Australian company has total assets of $150 million and debt of $30 million. The firm's before-tax cost of debt is 5% and its cost of equity is 12%. If the corporate tax rate is 30%, calculate the firm's cost of capital and the appropriateness of its use as a discount rate in capital budgeting.
(b) Assume AUD = 0.58 GBP and inflation is 3.5% pa in Australia and 7% pa in Great Britain. Estimate the AUD/GBP spot rate in one year's time and comment on the accuracy of this estimate.
Jaguar Holdings Company can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm’s beta is 2. It has a targeted debt-to-equity ratio of 1:1 (25 percent debt, 75 percent equity).
What is its weighted average cost of capital?
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- Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1 and by 5% in Year 2. Its operating profitability ratio (OP) is 10%, and its capital requirement ratio (CR) is 80%? What are the projected sales in Years 1 and 2? What are the projected amounts of net operating profit after taxes (NOPAT) for Years 1 and 2? What are the projected amounts of total net operating capital (OpCap) for Years 1 and 2? What is the projected FCF for Year 2?arrow_forwardBHP Billiton, An Australian company's stock, has a beta of 0.80. The expected return on the market is 12 per cent, and Treasury bills are yielding 3,40 per cent. Further, the company has a debt issue outstanding with 15 years to maturity that is quoted at 65 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually, It considers a debt-equity ratio of 0.80 and a 25 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. You expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NW will grow at 10 per cent per year, It also has $19.5 million in debt and 400,000 shares outstanding, After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely, Answer the…arrow_forwardSandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar denominated cash flows consist of initial investment of $2,000 and a cash inflow the year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 US dollar will buy 0.91 Swiss franc. In addition, 1 year risk free securities in the US are yielding 3% while similar securities in Switzerland are yielding 1.50% a) If this project was instead undertaken by a similar U.S. based company with the same risk-adjusted cost of capital what would be the net present value and rate of return generated by this project?arrow_forward
- Sandrine Machinery is a Swiss multinational manufacturingcompany. Currently, Sandrine’s financial planners are considering undertaking a 1-yearproject in the United States. The project’s expected dollar-denominated cash flows consistof an initial investment of $2,000 and a cash inflow the following year of $2,400. Sandrineestimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy0.96 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding3%, while similar securities in Switzerland are yielding 1.50%.a. If this project was instead undertaken by a similar U.S.-based company with the samerisk-adjusted cost of capital, what would be the net present value and rate of returngenerated by this project?b. What is the expected forward exchange rate 1 year from now?c. If Sandrine undertakes the project, what is the net present value and rate of return ofthe project for Sandrine?arrow_forwardBHP Billiton, An Australian company's stock, has a beta of 1.20. The expected return on the market is 12 per cent, and Treasury bills are yielding 3.40 per cent. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 65 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.70 and a 25 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. You expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. What is the…arrow_forwardBHP Billiton, An Australian company's stock, has a beta of 0.90. The expected return on the market is 10.50 per cent, and Treasury bills are yielding 3.40 per cent. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 120 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. You expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer…arrow_forward
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