Assume the following information for Vermont Co., a U.S-based MNC that needs funding for a project in Germany: U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
US. corporate tax rate = 30% (federal and state combined )
German corporate tax rate = 40%
What is Vermont's after-tax cost of dollar-denominated debt?
A) 7.0 percent
B)4.9 percent
C) 8.0 percent.
D) 5.6 percent

Question

Assume the following information for Vermont Co., a U.S-based MNC that needs funding for a project in Germany: U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
US. corporate tax rate = 30% (federal and state combined )
German corporate tax rate = 40%
What is Vermont's after-tax cost of dollar-denominated debt?
A) 7.0 percent
B)4.9 percent
C) 8.0 percent.
D)  5.6 percent

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated as follows:
Cost of debt = Risk-free rate + Risk premium
For dollar-denominated debt:
Cost of debt = 4% + 3% = 7%
After-tax cost of debt = Cost of debt x (1 - Tax rate) = 7% x (1 - 0.3) = 4.9%

Assume the Following Information for Vermont Co