Luther Industries,a U.S.firm,is considering an investment in Japan.The dollar cost of equity for Luther is 12%.The risk-free interest rates on dollars and yen are r$ = 5.5% and r¥ = 1.5% respectively.Luther industries is willing to assume that capital markets are internationally integrated.Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates.The yen cost of equity for Luther Industries is closest to:

Question

Quizplus · Accepted Answer

The yen cost of equity can be calculated using the International CAPM formula: Yen cost of equity = Dollar cost of equity + (Yen risk-free rate - Dollar risk-free rate). Therefore, 12% + (1.5% - 5.5%) = 7.8%.