Weston Corporation, a US multinational, is considering building a new assembly plant in Thailand at a total cost of 300 million Baht to be financed with 50% debt and 50% equity.
Managers plan to raise half of the new debt with the sale of bonds in the US paying 8 interest annually and principal repayment in five years. The other half of the new debt will come from the sale of bonds in Thailand paying 10% interest annually and principal repayment in five years. The current spot rate is 30 Baht/USD and the Baht is expected to appreciate against the dollar by 2% per year over the next five years. Weston's marginal income tax rate is 30% in both the US and Thailand.

1. Excluding floatation costs, what is Weston's after-tax cost of debt for the project?
2. Assume Weston raises equity finance with the sale of shares in Thailand. If the average 90-day Thai T-bill rate is 5%, the average return on the Thai market index is 14% and Weston's equity beta is 1.5, what is Weston's cost of equity for the project?
3. What is Weston's WACC for the project?
4. Weston expects to receive net cash flows of 100 million Baht per year from the plant over ten years. At the end of the tenth year of operations, Weston will decommission the plant and expects to receive an additional salvage value of 30 million Baht. What is the net present value of the project in Baht? Should Weston proceed with the project?
5. Weston managers are concerned about political risk in Thailand and its potential negative impact on the value of the project. How would you recommend Weston managers take account of this possibility, i.e. build the political risk into the NPV calculation? (Provide a short answer of about a paragraph explaining your recommendation).

Answer rating: 100% (QA)

1 To calculate Westons aftertax cost of debt for the project we need to consider the interest rates and tax rates in both the US and Thailand For the ... View the full answer