Question
Consider the following information: Average interest rate for domestic debt; cost of debt (K D) is 5%. Average interest rate for global debt; cost of
Consider the following information:
Average interest rate for domestic debt; cost of debt (K D) is 5%.
Average interest rate for global debt; cost of debt (K9D) is 4%.
Tax rate is 20% (whether it uses domestic or
global debt capital market).
The firm's capital structure is that it has 300 million SAR equity and 100 million SAR debt.
The firm doesn't change its capital structure if it exposed to global capital market.
Domestic beta is 1.5
Global beta is 1
Risk-free rate (domestic and global is the same) is 3%
Expected local Market rate of return IS 10%
Expected global market rate of return is 12%.
a. Calculate domestic Weighted Average Cost of Capital (WACC) first you need to calculate cost of equity using CAPM
b. Calculate global Weighted Average Cost of Capital (WACC) first you need to calculate cost of equity using CAP
Briefly explain on a few words why one of them (either domestic or global) has lower WACC.
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