535: Ch. 17: #12 & 24

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12. Cost of Capital An MNC has total assets of $100 million and debt of $20 million. The firm’s before tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 40 percent. What is this firm’s cost of capital?

24. Assessing Foreign Project Funded with Debt and Equity Nebraska Co. plans to pursue a project in Argentina that will generate revenue of 10 million Argentine pesos (AP) at the end of each of the next 4 years. It will have to pay operating expenses of AP3 million per year. The Argentine government will charge a 30 percent tax rate on profits. All after-tax profits each year will be remitted to the U.S. parent and no additional taxes are owed. The spot rate of the AP is presently at $.20. The AP is expected to depreciate by 10 percent each year for the next 4 years. The salvage value of the assets will be worth AP40 million in 4 years after capital gains taxes are paid. The initial investment will require $12 million, half of which will be in the form of equity from the U.S. parent and half of which will come from borrowed funds. Nebraska will borrow the funds in Argentine pesos. The annual interest rate on the funds borrowed is 14 percent. Annual interest (and zero principal) is paid on the debt at the end of each year, and the interest payments can be deducted before determining the tax owed to the Argentine government. The entire principal of the loan will be paid at the end of year 4. Nebraska requires a rate of return of at least 20 percent on its invested equity for this project to be worthwhile. Determine the NPV of this project. Should Nebraska pursue the project?

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