Bidder Ltd, a U.S.-based corporation, wants to purchase Tara Corp. Bidders management believes that the country in which Tara is located is segmented from global capital markets.

Assumptions:

• The current U.S. Treasury bond rate is 2%.
• The expected inflation rate in Taras country is 5% annually, as compared to 2.0% in the U.S.
• The country risk premium (CRP) for Taras country provided by S&P is estimated to be 1.5%.
• Based on Taras interest coverage ratio, its credit rating is estimated to be AA. The current interest rate on AA-rated US corporate bonds is 3.0%.
• Since its marginal tax rate is higher than Taras, Bidders marginal tax rate of 35% is used in calculating WACC.
• Bidders pretax cost of debt is 4%. The firms total capitalization consists only of common equity and debt. Bidders projected debt-to-total capital ratio is 0.4.
• Taras beta and the country beta are estimated to be 1.8 and 0.6, respectively.
• The equity premium is estimated to be 5% based on the spread between the prospective return on the countrys equity index and the estimated risk-free rate of return.
• Given Tara Inc.s current market capitalization of $2 billion, the firms size premium (FSP) is estimated at 1.5.

What is the appropriate weighted average cost of capital (WACC) Bidder Ltd should use to discount Taras projected annual local currency cash flows?