Fin 427- Exam 2
Spring 2020- Take Home Open Book Assessment
Just use these Data Sources:
– To get the US treasury bills and bonds rates go to : www.ustreas.gov
– To get the country’s risk premium, go to Damodaran’s website ( http://damodaran.com ), go to data, current data, risk premiums for other markets. You can also use this website for Betas if you couldn’t find your company’s beta online.
– For Return on Market, based on the company’s country, you can look up the return on market as return on one of the popular indices used in that market by looking it up on the internet. You can use the average for year 2019 if you used the recent 2020 numbers and found your cost of equity to be unreasonable (due to the current circumstances that global markets are witnessing).
– To get the company’s financial information, visit the company’s website (try to find an investor relations section), or get the info from the financial market’s website (for example LSE if it was London Stock Exchange etc..), you will need the most recent stock price data as well which you will get from there.
Plagiarism:
Notice that this should be a result of your team’s work & since you need to use the most recent financial information & stock price & data, it should be hard to copy such info from other sources (e.g. use an existing online case).
General Instructions:
Please type in the answers (not hand-written) and keep each question (answer below it).
Calculation of Cost of Capital for a Foreign Company
Instructions: You should have by now picked a globally publicly listed company (so it should NOT be based in USA and NOT based in UAE, and NOT A FINANCIAL INSTITUTION, it should has stock publicly listed in a foreign market) and formed a pair. Ans) Which we chose Canon company
We are assuming that we have a US MNC which wants to conduct a project in the foreign country that you picked. And that you will be using the company that you picked as a benchmark for the discount rate that the MNC should use to evaluate that foreign project. The project is estimated to have a life of 5 yrs. Answer the following questions which will help you in computing the WACC of that foreign company (the one you picked (canon)) and hence the discount rate that should be used to evaluate the project.
1) Write a brief paragraph talking about your company and why you chose it. It should include some relevant info that a person needs to know once deciding on the cost of capital of a certain company. (5 pts) (use simple English words, brief)
2) What does the risk-free rate mean? Provide an estimation of the risk-free rate that you will use in your computation (provide the value, source (from where did you pick this answer? You must put a link to the answer in order for me for check it), date, as well as short explanation behind your answer.) (6 pts)
3) What does the equity market risk premium mean? Estimate the equity market risk premium under two approaches:
a. Using the foreign market data (3 pts)
b. Using the country risk premium approach (3 pts)
(provide the value, sourc e(from where did you pick this answer? You must put a link to the answer in order for me for check it, as well as short explanation behind your answer and what you were doing in each step. If you couldn’t do the estimation using foreign market data, then explain the data limitation that you faced).
c. Where your two numbers close? If not, can you identify a reason why not? Then choose which method you will be using in your final computation. (2 pts)
4) What does the beta measure? Provide an estimation of your company’s beta (provide the value, the source (from where did you pick this answer? You must put a link to the answer in order for me for check it, and interpretation of what the beta of your company implies) (5 pts)
5) Compute your estimated cost of common equity using CAPM (points 2,3,4 above). (5 pts)
6) Estimate the after-tax cost of debt (provide the value as well as a short explanation behind what you did to compute the cost of debt). (6 pts)
7) Estimate the WACC (describing in detail how you got the target capital structure weights, including the sources and dates of when the information was gathered). (10 pts)
8) Explain what the WACC means and how can you use it in decisions. (5 pts)
9) Do you think that you got a reasonable estimate for the WACC? You need to explain how you know if it is reasonable or not. (8 pts)
10) Explain why an MNC might need to use a different cost of capital to evaluate the projects of its foreign subsidiaries rather than using its own domestic parent’s cost of capital. (7 pts)
Important NOTE:
The post Fin 427- Exam 2 Spring 2020- Take Home Open Book Assessment appeared first on EssayBishop.