Assume that a multinational company based in South Africa is considering a new business venture in which the expected weighted average cost of capital is 8%. The company has an option to operate in Botswana which the government decided not to charge any taxes or in Lesotho which impose a 25% corporate tax. The companys cost of debt is 6% in Botswana and 4% in Lesotho.

Calculate the companys cost of equity in Botswana and Lesotho separately at debt-to-equity ratio levels of: (i) 0.5, (ii) 1.5. What can you conclude about the relationship between cost of equity and interest rates?