Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in the euro area.

Question:

Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in the euro area. You are in Manzetti's corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are uncorrelated to the spot exchange rate and are shown here:

Year Free Cash Flow (€)

0 .............................................. -25

1 ............................................... 12

2 ............................................... 14

3 ............................................... 15

4 ............................................... 15

The new project has similar dollar risk to Manzetti's other projects. The company knows that its overall dollar WACC is 9.5%, so it feels comfortable using this WACC for the project. The risk-free interest rate on dollars is 4.5% and the risk-free interest rate on euros is 7%.

a. Manzetti is willing to assume that capital markets in the United States and the euro area are internationally integrated. What is the company's euro WACC?

b. What is the present value of the project in euros?

Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...