Concept explainers
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in the euro area. You are in Etemadi’s
You know that the spot exchange rate is S = $1.15/ €. In addition, the risk-free interest rate on dollars is 4% and the risk-free interest rate on euros is 6%.
Assume that these markets are internationally integrated and the uncertainty in the free cash flows is not correlated with uncertainty in the exchange rate. You determine that the dollar WACC for these cash flows is 8.5%. What is the dollar present value of the project? Should Etemadi Amalgamated undertake the project?
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