Joen is a U$.$S$.$ firm that conducts major importing and exporting business in Japan, whereby all transactions are invoiced in dollars. It obtained debt in the U$.$S$.$ at an interest rate of $10$ percent per year. The long$-$term risk$-$free rate in the U$.$S$.$ is $8$ percent. The stock market return in the U$.$S$.$ is expected to be $14$ percent annually. Joen's beta is $1\mathrm{.}2.$ Its target capital structure is $30$ percent debt and $70$ percent equity. Joen Co$.$ is subject to a $25\%$ corporate tax rate.

a$.$ Estimate the cost of capital to Joen Co$.$

b$.$ Joen has no subsidiaries in foreign countries but plans to replace some of its dollar$-$denominated debt with Japanese yen$-$denominated debt, since Japanese interest rates are low. It will obtain yen$-$denominated debt at an interest rate of $5$ percent. It can not effectively hedge the exchange rate risk resulting from this debt because of parity conditions that makes the price of derivatives contracts reflect the interest rate differential. How could Joen Co$.$ reduce its exposure to the exchange rate risk resulting from the yen$-$denominated debt without moving its operations?

Measuring the Cost of Capital. Messan Co$.($a U$.$S$.$ firm$)$ borrows U$.$S$.$ funds at an interest rate of $10$ percent per year. Its beta is $1\mathrm{.}0.$ The long$-$term annualized risk$-$free rate in the U$.$S$.$ is $6$ percent. The stock market return in the U$.$S$.$ is expected to be $16$ percent annually. Messan's target capital structure is $40$ percent debt and $60$ percent equity. Messan Co$.$ is subject to a $30\%$ corporate tax rate. Estimate the cost of capital to Messan Co$.$