The ABC Company,a U.S.-based MNC,plans to establish a subsidiary in Spain to manufacture and sell water pumps.ABC has total assets of $80 million,of which $60 million is equity financed.The remainder is financed with debt.ABC considers its current capital structure optimal.The construction cost of the facility in Spain is estimated to be €8,500 million,of which €6,500 million is to be financed at a below-market rate of interest arranged by the Spanish government.The proposed project will increase the borrowing capacity by

Question

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The current debt-to-equity ratio is 1/3 ($20 million debt / $60 million equity). To maintain this ratio, the debt for the new project should be 1/3 of the equity. The equity portion of the project is €2,000 million (€8,500 million - €6,500 million). Therefore, the debt should be €2,000 million / 3 = €666.67 million. Since €6,500 million is already financed, the increase in borrowing capacity is €6,500 million - €666.67 million = €2,215 million.