Cost of Equity Illinois Co. is a U.S. firm that plans to expand its business overseas. It plans to use all the equity to be obtained in the United States to finance a new project. The project’s cash flows are not affected by U.S. interest rates. Just before Illinois Co. obtains new equity, the U.S. risk-free interest rate rises. Will the change in interest rates increase, decrease, or have no effect on the required rate of return on the project? Briefly explain.

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 31QA
Textbook Problem

Cost of Equity Illinois Co. is a U.S. firm that plans to expand its business overseas. It plans to use all the equity to be obtained in the United States to finance a new project. The project’s cash flows are not affected by U.S. interest rates. Just before Illinois Co. obtains new equity, the U.S. risk-free interest rate rises. Will the change in interest rates increase, decrease, or have no effect on the required rate of return on the project? Briefly explain.

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