Company X has an investment opportunity in Europe. The project costs €30,000,000 and is expected to produce cash flows of €21,000,000in Year 1, €31,000,000 in Year 2 and €22,000,000 in Year 3. The current exchange rate is €1.25% and the current risk free rate in United States is 5% compared to that of Europe of 3.5%. The appropriate discount rate for the project is estimated to be 13% the U.S. cost of capital for the company. In addition the subsidiary can be sold at the end of three years for an estimated €6,250,000. a. What is the NPV of the project? *Use the Home Currency Approach to calculate the NPV.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Company X has an investment opportunity in Europe. The project costs €30,000,000 and is expected to produce cash flows of €21,000,000in Year 1, €31,000,000 in Year 2 and €22,000,000 in Year 3. The current exchange rate is €1.25% and the current risk free rate in United States is 5% compared to that of Europe of 3.5%. The appropriate discount rate for the project is estimated to be 13% the U.S. cost of capital for the company. In addition the subsidiary can be sold at the end of three years for an estimated €6,250,000.
a. What is the
*Use the Home Currency Approach to calculate the NPV.
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