International Financial Management 6th Edition by Sanjiv Eun, Cheol Resnick, Bruce Sabherwal

Exercise 17

The Alpha Company plans to establish a subsidiary in Hungary to manufacture and sell fashion wristwatches. Alpha has total assets of $70 million, of which $45 million is equity financed. The remainder is financed with debt. Alpha considered its current capital structure optimal. The construction cost of the Hungarian facility in forints is estimated at HUF2,400,000,000, of which HUF1,800,000,and 000 is to be financed at a below-market borrowing rate arranged by the Hungarian government. Alpha wonders what amount of debt it should use in calculating the tax shields on interest payments in its capital budgeting analysis. Can you offer assistance