Question: No excel needed, do explain a little how you got the answer Forty Acre Inc. (FA), a U.S.-based multi-national company, has screened several acquisition targets

No excel needed, do explain a little how you got the answer

Forty Acre Inc. (FA), a U.S.-based multi-national company, has screened several acquisition targets in Malaysia. FA has identified a Malaysian company, KL Rubber, which would provide a good strategic fit for FA. The tax rate on the firm's earnings is expected to be 35%. The exchange rate is currently $.2554/MYR. Inflation is expected to average 7.5% in Malaysia and 2.0% in the U.S. The risk-free rate in the U.S. is 3.25%. Assume a 6.0% market risk premium. FA has estimated the beta this investment is 1.1. For this project, FA plans to borrow MYR 250 million on a revolving loan at 9.5% interest. The investment will require another MYR 200 million in equity capital. What is the appropriate discount rate that KL Rubber should use to evaluate this investment?

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1. Identify your reference point when making a decision based on an element of risk.

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