Chapter 17, Problem 30QA

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.

FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinationalmanufacturing company. Currently, Sandrine’s financial planners are consideringundertaking a 1-year project in the United States. The project’s expected dollardenominated cash flows consist of an initial investment of $2,000 and a cash inflow thefollowing year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%.Currently, 1 U.S. dollar will buy 0.94 Swiss franc. In addition, 1-year risk-freesecurities in the United States are yielding 3%, while similar securities in Switzerlandare 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 of theproject for Sandrine?

Quantitative Problem: International Machinery Company (IMC) is a Swedish multinational manufacturing company. Currently, IMC's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2,100 and a cash inflow the following year of $3,700. IMC estimates that its risk-adjusted cost of capital is 17%. Currently, 1 U.S. dollar will buy 9.3 Swedish kronas. In addition, 1-year risk-free securities in the United States are yielding 4%, while similar securities in Sweden are yielding 3%. a. If the interest parity holds, what is the forward exchange rate of Swedish kronas per U.S. dollar? Do not round intermediate calculations. Round your answer to four decimal places.  Swedish kronas per U.S. dollar b. If IMC undertakes the project, what is the net present value and rate of return of the project for IMC in home currency? Do not round intermediate calculations. Round your…