• An MNC has total assets of $100 million and debt of $20 million. The firm's before-tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 40 percent. What is this firm's cost of capital?

 
1. Cost of Equity
   • Wiley, Inc., an MNC, has a beta of 1.3. The U.S. stock market is expected to generate an annual return of 11 percent. Currently, Treasury bills yield 2 percent. Based on this information, what is Wiley's estimated cost of equity?
2. Floating-Rate Bonds
   • What factors should be considered by a U.S. firm that plans to issue a floating rate bond denominated in a foreign currency?
   • Is the risk of issuing a floating rate bond higher or lower than the risk of issuing a fixed rate Eurobond? Explain.
   • How would an investing firm differ from a borrowing firm in the features (i.e., interest rate and currency's future exchange rates) it would prefer a floating rate foreign currency-denominated bond to exhibit?
3. Bond Financing Analysis
   • Hawaii Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in dollars. The prevailing U.S. long-term interest rate is 9 percent versus 3 percent in Japan. Assume that interest rate parity exists and that Hawaii Co. believes that the international Fisher effect holds.
     • Should Hawaii Co. finance its production with yen and leave itself open to the exchange rate risk? Explain.
     • Should Hawaii Co. finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk?
     • How can Hawaii Co. achieve low-cost financing while eliminating its exposure to exchange rate risk?