Question

Assume the following information for Top One  Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany:

U.S. risk-free rate = .04

German risk-free rate = .06

Risk premium on dollar-denominated debt provided by U.S. creditors = 0.04

Risk premium on euro-denominated debt provided by German creditors = .04

Beta of project = 1.2

Expected U.S. market return = .10

U.S. corporate tax rate = 0.28

German corporate tax rate = .40

What is Top One’s cost of dollar-denominated debt?

Answer 1

(US risk free rate + risk premium on dollar denominated debt provided by US creditors)* ( 1- US corporate tax rate) = cost of US dollar denominated debt

= ( 4%+ 4%) * ( 1- 0.28) = 8% * 0.72 = 5.76 %

cost of US dollar denominated debt = 5.76%