A MNE raises capital in two different countries with the following characteristics: $150,000,000 in 10-year bonds paying 8% interest with total floatation costs of $10,000,000 issued in Country A where the firm pays a marginal income tax rate of 35%. $300,000,000 in 20-year bonds paying 9.5% interest with total floatation costs of $15,000,000 issued in Country B where the firm pays a marginal income tax rate of 30%. $300,000,000 in Common Stock issued in Country A where the firm's shares have a beta of 1.2. $350,000,000 in Common Stock issued in Country B where the firm's shares have a beta of 1.3. Assume all bonds are denominated and repaid in the firm's home currency. Assume a risk-free rate of return of 4%. Assume a rate of return on the market portfolio of 11%. What is the company's after-tax cost of debt in Countries A and B, respectively?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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