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A U.S. firm is considering purchasing a subsidiary in the UK. The subsidiary will cost 6M British pounds and will generate cash inflows of 1.2M
A U.S. firm is considering purchasing a subsidiary in the UK. The subsidiary will cost 6M British pounds and will generate cash inflows of 1.2M pounds per year forever. The current exchange rate is 0.8 pounds/\$. The average inflation rate is expected to be 3% in the US. The current risk-free rate of 5% in the US and 8% in the UK. Assume the cost of capital for this project is 10% on dollar investments. What is the approximate discount rate you would use to discount the cash flows if you were to evaluate this project using the foreign currency approach
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