IBM., a successful US-based MNC, is considering how to obtain funding

for a project in Argentina during the next year. It considers the following

information:

US Risk free rate= 8%

Argentine risk free rate=12%

Risk premium on dollar-denominated debt provided by US creditors=3%

Risk premium on peso-denominated debt provided by US creditors=5%

Beta of project (expected sensitivity of project returns to US investors

response to the US market)=1.5

Beta of project (expected sensitivity of project returns to AR investors

response to the AR market)=1.8

Expected US market return=15%

Expected AR market return=14%

Us corporate tax rate=30%

Argentine corporate tax rate =30%

Creditors will likely allow no more than 50 percent of the

financing to be in the form of debt, which implies that equity

must provide at least 50% of the financing that can be financed

from subsidiary also. But financing fragment cannot be less than

20%.