A large multinational firm has decided to look for investment opportunities. In order to evaluate them, it must raise capital and determine the target weighted average cost of capital (WACC). Given the following assumptions, compute the WACC:
weights of 40% debt and 60% common equity (not preferred equity),
35% tax rate,
8% cost of debt,
1.5 beta of the company,
2% risk-free rate, and
11% return on the market.
Would you support this multinational corporation, which would favor financing through bonds issues, or would you rather support that it favors financing through stock issues? Be sure to provide a rationale for your argument.
Finally, this multinational corporation has been asked to lend money for a major commercial real estate development in a foreign country. At the same time, there have been reports of a further devaluation of that foreign country’s currency. With regard to translation exposure, economic exposure (operating and transaction), and exchange risk, how would this impact your assessment of the creditworthiness of this project?
Your written analysis of this case study must be at least two pages in length. No outside sources are necessary to complete this assignment; however, APA Style should be adhered to for the overall structure of the case study. No abstract is needed.
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