Intro

International Shipping Lines is a U$.$S$.$ based operator of container ships. The company is considering opening a new shipping hub in Greece:

The hub will cost $75$ million to build, and will generate cash flows of $20$ million in each of the next four years. At the end of year $4,$ it can be sold for $45$ million $($after taxes$).$

The current exchange rate is $$1\mathrm{.}08$ per euro. The company expects the exchange rate to stay constant.

To evaluate the proposal, the company needs to calculate its cost of capital. It has collected the following information:

The company would have to pay an interest rate of $7\%$ on new bonds.

The company uses the CAPM to find the cost of equity. Its beta is $1\mathrm{.}3,$ the yield on Treasury bonds is $3\%$ and the expected return on the market $($S&P $500)$ is $5\%.$

The company wants to maintain is current capital structure. The value of bonds is $$69$ million and the market value of equity is $$120$ million.

The U$.$S$.$ tax rate is $21\%.$

Part $1$

Attempt $\frac{1}{10}$ for $10$ pts$.$

What is the cost of equity?

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Part $2$

Attempt $\frac{1}{10}$ for $10$ pts$.$

What is the company's cost of capital?

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