6. Which cost of capital? (advanced). Guillaume Tel of Ciments Lafarge was unsure about the legitimacy of
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6. Which cost of capital? (advanced). Guillaume Tel of Ciments Lafarge was unsure about the legitimacy of applying a discount rate of 10.5 percent to value the acquisition of Hoang Thach Cement Company. After all, Ciments Lafarge’s company-wide WACC was estimated at 9 percent and the country risk premium applied to Vietnam was set at 365 basis points.
a. How was the 10.5 percent discount rate derived? How would you justify its use?
b. Should a country risk premium be added to the 10.5 percent discount rate?
c. What appropriate discount rate should be applied to the valuation of Hoang Thach Cement Company?
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