Question
Cost of Capital. Suppose HOLA Corp is considering a three-year project in Colombia, which requires an investment of COP 5 billion (COP: Colombian peso). HOLA
Cost of Capital. Suppose HOLA Corp is considering a three-year project in Colombia, which requires an investment of COP 5 billion (COP: Colombian peso). HOLA is planning to use the usual 70/30 D/E split. To calculate the cost of capital, HOLA gathers the following data (all annualized): HOLA can borrow in Colombia at 8%.
4 3-year government (risk-free) rates: 6.5% in Colombia and 1% in the U.S.
Effective corporate tax rate in Colombia: 25%
Expected Colombian stock market return: 13%
Expected U.S. stock market return: 9.5%
Beta of the project: 1.3
Using Weighted-Average Cost of Capital (WACC), calculate the cost of capital for the Colombian project.
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