International Weighted Average Calculation Analysis For Th

Question

International Weighted Average Of Calculation Analysisfor This Assignm International Weighted Average of Calculation Analysis for this assignment, make certain to show your work where computations are involved and to provide thorough, well-developed answers for conceptual ones. 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.

Dr. Jack HW Helper · Accepted Answer

Introduction The analysis of the weighted average cost of capital (WACC) is a crucial component for multinational corporations (MNCs) when evaluating investment opportunities and capital raising strategies. Calculating the WACC involves understanding the proportionate costs of debt and equity financing, as well as considering tax implications and market risk factors. Furthermore, assessing the firm's capital structure choices and the associated currency exchange risks becomes essential, especially when transnational financial activities are involved. This paper presents a detailed calculation of the WACC for a hypothetical multinational firm, discusses the implications of its financing preferences, and evaluates the impact of foreign currency devaluation on a cross-border lending initiative. Calculation of the WACC The WACC formula combines the costs of debt and equity, weighted by their respective proportions in the firm’s capital structure, and adjusted for taxes. It is expressed as: $$ \text{WACC} = (w_d \times r_d \times (1 - T)) + (w_e \times r_e) $$ where $w_d$ is the weight of debt, $r_d$ is the cost of debt, $T$ is the tax rate, $w_e$ is the weight of equity, and $r_e$ is the cost of equity. Given data: - Weight of debt ($w_d$) = 40% or 0.40 - Weight of equity ($w_e$) = 60% or 0.60 - Tax rate ($T$) = 35% or 0.35 - Cost of debt ($r_d$) = 8% - Beta ($\beta$) = 1.5 - Risk-free rate ($r_f$) = 2% - Market return ($r_m$) = 11% First, calculate the cost of equity $r_e$ using the Capital Asset Pricing Model (CAPM): $$ r_e = r_f + \beta \times (r_m - r_f) $$ Substituting the values: $$ r_e = 2\% + 1.5 \times (11\% - 2\%) = 2\% + 1.5 \times 9\% = 2\% + 13.5\% = 15.5\% $$ Next, compute the after-tax cost of debt: $$ r_d(1 - T) = 8\% \times (1 - 0.35) = 8\% \times 0.65 = 5.2\% $$ Now, calculate the WACC: $$ \text{WACC} = (0.40 \times 5.2\%) + (0.60 \times 15.5\%) = 2.08\% + 9.3\% = 11.38\% $$ Thus, the target WACC for the multinational firm is

International Weighted Average Calculation Analysis For Th

International Weighted Average Of Calculation Analysisfor This Assignm

Paper For Above instruction

Introduction

Calculation of the WACC

Implications of Financing Preferences

Foreign Currency Devaluation and Cross-Border Lending Risks

Conclusion

References