1. pension plan managing a global large-cap fund internally. Sandell is concerned about one of the funds larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in80countries, with the previous years global revenues at $5.6 billion. Recently, Kruspas CFO announced plans for expansion into China. Sandell worries that this expansion will change the companys risk prole and wonders if he should recommend a sale of the position. Sandell provides Knudsen with the basic information. Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a Kruspas global annual free cash ow to the rm is $500 million and earnings are $400 million. Sandell estimates that cash ow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspas after-tax free cash ow to the rm on the China project for next three years is, respectively, $48 million, $52 million, and $54.4 million. Kruspa recently announced a dividend of $4.00 per share of stock. For the initial analysis, Sandell requests that Knudsen ignore possible currency uctuations. He expects the Chinese plant to sell only to customers within China for the rst three years. Knudsen is asked to evaluate Kruspas planned nancing of the required $100 million with a $80 public offering of 10-year debt in Sweden and the remainder with an equity offering. Additional information:

Rm=Equity risk premium, Sweden 4.82%

Rf=Risk-free rate of interest, Sweden 4.25%

Industry debt-to-equity ratio 0.3

Market value of Kruspas debt $900 million

Market value of Kruspas equity $2.4 billion

- Kruspas equity beta 1.3

- Kruspas before-tax cost of debt 9.25%

- China credit A2 country risk premium 1.88%

- Corporate tax rate 37.5%

- Interest payments each year Level

Required:

1. Using the capital asset pricing model, Calculate the Kruspas cost of equity capital for its typical project.
2. Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the China project, calculate this weighted average cost of capital (WACC) of this project.
3. In his estimation of the projects cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations, estimate the asset beta of Kruspa prior to the China project.