Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a

pension plan managing a global large-cap fund internally. Sandell is concerned about one of the fund's

larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in80countries, with the

previous year's global revenues at $5.6 billion. Recently, Kruspa's CFO announced plans for expansion

into China. Sandell worries that this expansion will change the company's risk prole and wonders if he

should recommend a sale of the position. Sandell provides Knudsen with the basic information.

Kruspa's global annual free cash ow to the rm is $500 million and earnings are $400 million. Sandell

estimates that cash ow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspa's

after-tax free cash ow to the rm on the China project for next three years is, respectively, $48 million,

$52 million, and $54.4 million. Kruspa recently announced a dividend of $4.00 per share of stock. For

the initial analysis, Sandell requests that Knudsen ignore possible currency uctuations. He expects the

Chinese plant to sell only to customers within China for the rst three years. Knudsen is asked to

evaluate Kruspa's planned nancing of the required $100 million with a $80 public offering of 10-year

debt in Sweden and the remainder with an equity offering. Additional information:

Rm=Equity risk premium, Sweden 4.82%

Rf=Risk-free rate of interest, Sweden 4.25%

Industry debt-to-equity ratio 0.3

Market value of Kruspa's debt $900 million

Market value of Kruspa's equity $2.4 billion

Kruspa's equity beta 1.3

Kruspa's before-tax cost of debt 9.25%

China credit A2 country risk premium 1.88%

Corporate tax rate 37.5%

Interest payments each year Level

Required:

a) Using the capital asset pricing model, Calculate the Kruspa's cost of equity capital for its typical

project.

b) Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in

the China project, calculate this weighted average cost of capital (WACC) of this project.

c) In his estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa

as a base in his calculations, estimate the asset beta of Kruspa prior to the China project.