Groupe Ariel S.A.: Parity Conditions and Cross-Border Valuation

(ii) How should Arnaud Martin estimate the cost of capital for this investment? To answer this question, consider whether the discount rate used will be different if this were an investment back in France.

Include the following:

Group Ariel's hurdle rate is 8% if the project was undertaken in Euros in france

But project is proposed for mexican subsidiary

Therefore, will need to consider inflation differentials

We assumed that international fisher effect held: hurdle rate differential was equal to inflation rate differential between two countries

Mexico had a higher level of forecasted inflation at 7% expect that the hurdle rate will be higher

Therefore, calculated hurdle rate for mexico was 12.19%