A MNE has a capital structure with the following features:

$150,000,000 in 30-year domestic bonds yielding 7.5% annually with $6 million in floatation costs.

$100,000,000 in 10-year foreign bonds yielding 8.0% annually with $8 million in floatation costs.

$300,000,000 in common stock trading on the home market with a beta of 1.4.

$200,000,000 in common stock trading on a foreign exchange with a beta of 1.8.

 
1. If the MNE has a marginal income tax rate of 40% at home and 25% in the foreign country, what is its respective after-tax cost of debt at home and abroad?

2. If the two markets where the company's common stock trades are integrated, the risk-free rate of return is 4% and the return on the market portfolio is 10%, what is the company's cost of equity, respectively, at home and abroad?

Answer rating: 100% (QA)

1 To calculate the aftertax cost of debt we need to adjust the yields on the bonds for the tax deduc... View the full answer