Question 3 (30 marks) A U.S. company namely Alpha Best Corporations capital structure is composed of 40 percent debt and 60 percent equity. Its cost of equity capital is 12 percent and its before-tax borrowing rate is 8 percent. Given a marginal tax rate of 35 percent, calculate a) the weighted-average cost of capital; (6 marks) b) the cost of equity for an equivalent all-equity financed firm. (8 marks) c) The company is planning to invest in South Korea. The investment requires initial outlay of South Korean won KRW80,000. The annual cash flows over the five year economic life of the investment in KRW are estimated to be 300,000, 400,000, 500,000, 600,000, and 700,000. The parent firms cost of capital in dollars is 9.5 percent. Inflation in the U.S. is 3 percent per annum and 7 percent in South Korea. The current spot foreign exchange rate is KRW1336.42/$. i) Calculating the NPV in KRW using the KRW equivalent cost of capital according to the Fisher Effect and then converting to USD at the current spot rate. (6 marks) ii) Converting all cash flows from KRW to USD at Purchasing Power Parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. (6 marks) iii) What can you conclude based on the answers in (a) and (b)? (4 marks)