Find Olivetti's weighted average cost of capital under each of the following scenarios.
a. Olivetti has a market value debt-to-value ratio of 50 percent. Olivetti's pretax borrowing cost on new long-term euro-denominated debt is 6 percent. Olivetti's beta relative to MSCI's world stock market index is 1.0. The euro risk-free rate is 5 percent. The risk premium on the MSCI world stock market is 4 percent. Interest is deductible in Italy at the marginal corporate income tax rate of 40 percent. What is Olivetti's weighted average cost of capital in this setting?
b. Suppose Olivetti is expected to generate after-tax operating cash flow of one billion euros in the coming year and that this cash flow is expected to grow at a 2 percent rate in perpetuity. Value Olivetti with the equation V0 = CF1 / (i - g), where CF1 is the coming year's after-tax operating cash flow, i is the weighted average cost of capital, and g is the growth rate of operating cash flow.