Part2: Research Project - Group Work (team of 2) 15% Objective: To estimate a foreign companys WACC using data retrieved from Bloomberg terminals and to use that WACC as a discount rate in conducting a capital budgeting decision. I: (Total 65 points) Calculation of Cost of Capital for a Foreign Company Instructions: We are assuming that we have a US MNC which wants to conduct a project in the foreign country that you picked. And that you will be using the company that you picked as a benchmark for the discount rate that the MNC should use to evaluate that foreign project. The project is estimated to have a life of 5 yrs. Answer the following questions which will help you in computing the WACC of that foreign company (the one you picked) and hence the discount rate that should be used to evaluate the project. 1) Write a brief paragraph talking about your company and why you chose it. It should include some relevant info that a person needs to know once deciding on the cost of capital of a certain company. (5 pts) 2) What does the risk-free rate mean? Provide an estimation of the risk-free rate that you will use in your computation (hint: you should retrieve this from Bloomberg and briefly explain which rate you used and why) (6 pts) 3) What does the equity market risk premium mean? Estimate the equity market risk premium using data retrieved from Bloomberg (briefly explaining the choices of your inputs). (8 pts) 4) What does the beta measure? Provide an estimation of your companys beta (using data retrieved from Bloomberg) (5 pts) 5) Compute your estimated cost of common equity using CAPM (5 pts) 6) Estimate the after-tax cost of debt (provide the value as well as a short explanation behind what you did to compute the cost of debt i.e. clearly indicate what you retrieved from Bloomberg and how did you compute the after tax cost of debt). (6 pts) 7) Estimate the WACC (describing in detail how you got the target capital structure weights, including the sources and dates of when the information was gathered). (10 pts) 8) Explain what the WACC means and how can you use it in decisions. (5 pts) 9) Do you think that you got a reasonable estimate for the WACC? You need to explain how you know if it is reasonable or not. (8 pts) 10) Explain why an MNC might need to use a different cost of capital to evaluate the projects of its foreign subsidiaries rather than using its own domestic parents cost of capital. (7 pts) NOTE: Notice that there is no one or correct answer for your WACC. However, the ideal solution/analysis is the one that clearly explains any assumptions and sources of information used , clearly lists the steps used to compute the WACC, and finally mentions any possible limitations in the WACC that they have computed (or find out if it was reasonable or not). Part II (35 points) Look up the current foreign exchange rate of your companys currency with respect to the US$. 1- What is the direct quotation of this foreign currency? (Include the source and date) (5 pts) 2A) Assuming the following estimated cash flows for the project, and that the $US will depreciate by 2% each year starting from next year, decide whether the company should accept this project and explain why or why not? You are free to use an excel sheet for the computation of the capital budgeting cash flow estimation, but then copy the final table to this word file. Any time I am referring to foreign currency I am meaning the currency of the company that you picked. The project is estimated to generate revenue of 15 million (foreign currency) for each of the next 5 years. It will have to pay operating expenses of 7 million (foreign currency) per year. In addition, depreciation is expected to be 1 million (foreign currency) per year. The project can be sold for 50 million (foreign currency) at the end of its life (net of any capital gain taxes). The foreign government charges 30 percent tax rate on profits and an additional 10 percent on any remitted (transferred) funds. The parent company will finance the project which costs 70 million (foreign currency) if it decides to undertake it. (20 pts) B) Calculate the break-even salvage value in $ for this project. What does break even salvage value mean? (10 pts) .