Hersheys is considering expanding its operations into Malaysia. It is trying to estimate the appropriate cost of
Question:
Hershey’s is considering expanding its operations into Malaysia. It is trying to estimate the appropriate cost of capital to use in evaluating this expansion option and has collected the following information:
• The beta for Hershey stock is 0.95
• Hershey has traditionally used only a small amount of debt; its current ratio of debt to total assets is 12%. It is planning to raise this debt ratio to 20% • The cost of debt for Hershey is 8% and tax rate is 36%
a. Estimate the cost of capital, in domestic currency, for this project. Assume the long term risk free rate is 2.5% and the expected equity risk premium is 7%.
b. Would you suggest to charge a premium for Malaysia currency risk? Why or why not?
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston