Question
Assume that Walmart is considering opening a store in Argentina. Argentina is rate BB-, and its dollar-based bonds trade at a default spread of 3%
Assume that Walmart is considering opening a store in Argentina. Argentina is rate BB-, and its dollar-based bonds trade at a default spread of 3% over the US treasury bond rate of 6.5%. The Argentine equity market is 1.8 times more volatile than the Argentine long-term bond market. Walmart has a beta of 0.9 (already relevered to account for the Argentinian tax rate of 35% and Argentinian D/E ratio). The market risk premium in the United States is 5.5%. The firm intends to borrow in Argentina at a local rate of 12% (in pesos) and maintain a debt ratio of 25% for Argentine projects. You can assume that the inflation rate in the United States is 3% whereas it is 9% in Argentina.
(a) Explain what we mean by the inflation rate in the above description.
(b) Estimate the cost of equity and the cost of capital in dollar terms for the Argentine store.
- Estimate the cost of equity and capital in peso terms of the Argentine store.
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