EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Chapter 31, Problem 8P

a.

Summary Introduction

To determine: The company’s euro weighted average cost of capital (WACC).

Introduction: The cost of capital is the WACC (Weighted Average Cost of Capital), which is the total rate of return for a company, which anticipates reimbursing all their investors. It is considered as a financing resource in the target capital structure of a company, and it is measured in terms of weights of fractions.

b.

Summary Introduction

To determine: The net present value of the project in euros.

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Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etemadi's corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are shown here: Year 1 2 3 Free Cash Flow (E million) 0 -15 1 8.9 9.5 11.7 You know that the spot exchange rate is $0.87/€. In addition, the risk-free interest rate on dollars is 3.9% and the risk-free interest rate on euros is 56%. Assume that these markets are internationally integrated and the uncertainty in the free cash flows is not correlated with uncertainty in the exchange rate. You determine that the dollar WACC for these cash flows is 8.4%. What is the dollar present value of the project? Should Etemadi Amalgamated undertake the project? (Enter all outflows of cash as negative numbers.)
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