Question: Question On Multinational Capital Structure & Capital Budgeting. Question 1 CahayaCo. is based in Malaysia. About 60% of its sales are from exports to Portugal.
Question On Multinational Capital Structure & Capital Budgeting.
Question 1
CahayaCo. is based in Malaysia. About 60% of its sales are from exports to Portugal. Cahaya Co. has no other international business. It finances its operations with 40% equity. The remainder of funds are financed with both ringgit-denominated and euro-denominated debt, which are divided equally. It borrows its funds from a Malaysian bank at an interest rate of 9 percent per year and from a Portugal bank at 8 percent per year. The long-term risk-free rate in Malaysia is 6 percent. The long-term risk-free rate in Portugal is 11 percent. The stock market return in Malaysia. is expected to be 13 percent annually. Cahaya's stock price typically moves in the same direction and by the same degree as the Malaysian stock market, thus its market risk is 1.0. Its earnings are subject to a 20% corporate tax rate in Malaysia and 30% in Portugal. Estimate the cost of capital to Cahaya Co.
Question 2
Bijaksana Co. is a non-profit educational institution thatwants to import educational software products from Hong Kong and sell them in Malaysia. It wants to assess the net present value of this project since any profits it earns will be used for its foundation. It expects to pay HK$1.2 million for the imports. Assume the existing exchange rate is HK$1 =MYR0.55. It would also incur selling expenses of MYR1 million to sell the products in Malaysia. It would be able to sell the products in Malaysia for MYR1.8 million.
Bijaksana's required rate of return on this project is 22%.
What is the project's expected net present value?
However, it is concerned about two forms of country risk. First, there is a high chance that the Hong Kong dollar will be revalued to be worth HK$1 = MYR0.60 by the Hong Kong government. Second, there is a high chance that the Hong Kong government imposes a special tax of 10% on the amount that Malaysian importers must pay for Hong Kong exports.
a.What is the project's expected net present value, considering the two forms of country risks?
b.What is the difference between the two expected NPVs, with and without the risks?
Question 3
The table below provides the correlations among TelPh, a telecommunication company located in the Philippines, the Philippines stock market index, and the world market index, together with the standard deviations (SD) of returns and the expected returns (). TelPh's cost of debt is 7%. The risk-free rate of interest is is 3.6%. TelPh's effective tax rate is 25%. Its optimal capital structure is 45% debt.
What is TelPh's weighted average cost of capital, if the Philippines stock market is integrated with the rest of the world?
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
Study Help