Question
DollarTrade Inc. is a US-based retail company that is considering entering the retail business in India. a. DollarTrade currently does all its business in the
DollarTrade Inc. is a US-based retail company that is considering entering the retail business in India. a. DollarTrade currently does all its business in the US and has a levered beta of 1.45; the risk free rate in US $ is 3%, the equity risk premium for the US is 5.5% and the expected inflation rate in US $ is 2%. b. DollarTrade has a market capitalization (equity) of $1 billion, no interest-bearing debt and $150 million in lease commitments each year for the next 5 years. The company has a BBB rating and the default spread for that rating is 2.5%. c. The equity risk premium in India is 10% and inflation rate in Indian Rupees is 7%. You can assume that the marginal tax rate is 40%. Estimate the Indian rupee cost of capital that DollarTrade should use for its Indian retail expansion, if it plans to fund that business entirely with equity. (Hint, find unlevered beta since Indian expansion is equity only; find US$ cost of equity in India, and then use the inflation rates to convert it to Rupees). a. 15.22% b. 19.04% c. 7.26% d. 12.24%
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