FIN $170$ International Finance

Name:

Ch$.12$ Cost of Capital $-$ Exercise

Ecos Inc. is a company headquartered in Des Moines, IA$,$ which specializes in manufacturing braided flexible metal conduit systems. Ecos is currently planning on investing USD $25$ million this year to build a manufacturing facility in the region of Michoac$$n de Ocampo, Mexico, to accommodate the local demand for its new product, Azterra T$1000$ Overbraided Conduits, over next three years.

Ecos's expected after$-$tax cash flow figures for next three years are: MXN $200$ million in year $1,$ MXN $330$ million in year $2$ and MXN $410$ million in year $3.$

Ecos has a beta of $1\mathrm{.}25.$

Ecos's debt to total asset ratio is $\mathrm{.}45$ with tax rate of $35\%.$ Its debts carry $9\mathrm{.}4\%$ yield to maturity.

Risk free rate is $4\%$ and the expected return on the market is $10\%.$

The Mexico's current and expected inflation rate is $3\mathrm{.}5\%$ per annum over next three years and the U$.$S$.$ inflation rate is expected to be $2\%$ per annum during the same period.

The current spot exchange rate is MXN $\frac{16\mathrm{.}594756}{?}$ USD or USD $\frac{0\mathrm{.}060260}{M}xN.$

Due to the country risk and foreign exchange risk, Ecos will add $150$ basis points to its WACC for the Mexico project.

Should Ecos invest? Assume that the PPP holds.