Finding Cost of Equity by using CAPM and NPV of the project with that rate.
1. A MNC can lend without risk at 3% and the return to the company is 9%. If a project has a β = 1.5 compared to the other investments of the company, what is the project's required rate of return?
2. An overseas project costs the equivalent of $1,000,000 in Argentine Pesos. Assume the F/X rate is hedged for the lifetime of the project and will be $0.50/Argentine Peso. The project will have a lifetime of four years and have no salvage value. The net cash flows will be constant and ARS 1,500,000 per year, except for the fourth year when it will be ARS 2,700,000. The cash flows take all costs into account, except for possible interest payments in Argentina (if the subsidiary borrows locally). The parent can convert this amount into the ARS and invest its own money or the subsidiary fund the entire project locally at 10% per year. The parent's discount rate for Argentina is 9%. How should the project be financed? Justify your answer numerically.