Assume the following information for Pexi Co.,a U.S.-based MNC that is considering obtaining 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%
U.S.corporate tax rate = 30%
German corporate tax rate = 40%
What is Pexi's cost of dollar-denominated equity
A) 12.0%.
B) 11.2%.
C) 10.0%.
D) 7.2%.

Question

Quizplus · Accepted Answer

The cost of dollar-denominated equity can be calculated with the capital asset pricing model (CAPM) as follows:
Cost of equity = U.S. risk-free rate + Beta * (Expected U.S. market return - U.S. risk-free rate)
Cost of equity = 4% + 1.2 * (10% - 4%)
Cost of equity = 11.2%
Therefore, the cost of dollar-denominated equity for Pexi Co. is 11.2%.

Assume the Following Information for Pexi Co