A U.S. based company borrowed £10 Million from the only willing lender: a British bank. The loan will be repaid in £ in one year, with 19% interest. The exchange rate at the time the loan was made was 0.64 £ per $. However, the exchange rate is expected to change to 0.60 £ per $ over the next year. The company estimates that its stock has a domestic beta of 2.5 against a domestic market portfolio (whose expected return is 7.0% per year), and an international beta of 1.75 against a global market portfolio with expected return of 8.4% per year.
1. What is the dollar-cost of debt? (the cost of debt rate in dollar terms)
2. Calculate the company’s cost of equity for both domestic-CAPM and International CAPM (ICAPM), if the risk free rate is 2.0%.
3.Using the effective cost of debt (dollar cost) and the ICAPM cost of equity, what is the company’s Weighted Average Cost of Capital (WACC) assuming marginal corporate tax rate of 35% and debt to value (D/V) ratio of 0.5?