Assume the following information for Pexi 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%
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

To calculate the cost of dollar-denominated equity, we use the Capital Asset Pricing Model (CAPM):
Cost of equity = Risk-free rate + Beta*(Expected market return - Risk-free rate)
= 4% + 1.2*(10% - 4%)
= 11.2%
Therefore, the answer is B.

Assume the Following Information for Pexi Co