Question 6. Multinational Capital budgeting. . A New Zealand firm, Pipi Ltd is considering setting up a project in Ruritania (whose currency is the kronor). The following information applies: Ruritania's bonds trade at a default spread of 2.5% over the NZ government bond rate of 2%. The Ruritanian equity market has an average volatility of 0.9 while the volatility of its long-term bond market is 0.5. The relevant beta for Pipi Ltd in New Zealand is 1.8 and the tax rate for the company in NZ is 25% while it is 35% in Ruritania. Please assume that no debt beta is necessary The market risk premium in NZ is 4.5%. Pipi Ltd intends to borrow in Ruritania at a local rate of 12% (in Ruritanian kronors) and maintain a debt ratio of 40% for Ruritanian projects in line with its debt ratio of 40% in NZ The inflation rate is 1% in NZ and 8% in Ruritania . . . Required: (a) Estimate the cost of equity in NZ dollar terms for Pipi's possible Ruritanian project. (7 marks) (b) Estimate the cost of capital (WACC) in NZ dollar terms for Pipi's possible Ruritanian project (4 marks) (c) Estimate the cost of equity in Ruritanian kronor terms for the Ruritanian project. (2 marks) (d) Estimate the WACC in Ruritaniaian kronor terms for the Ruritaniaian project (2 marks) TOTAL: 15 MARKS Question 6. Multinational Capital budgeting. . A New Zealand firm, Pipi Ltd is considering setting up a project in Ruritania (whose currency is the kronor). The following information applies: Ruritania's bonds trade at a default spread of 2.5% over the NZ government bond rate of 2%. The Ruritanian equity market has an average volatility of 0.9 while the volatility of its long-term bond market is 0.5. The relevant beta for Pipi Ltd in New Zealand is 1.8 and the tax rate for the company in NZ is 25% while it is 35% in Ruritania. Please assume that no debt beta is necessary The market risk premium in NZ is 4.5%. Pipi Ltd intends to borrow in Ruritania at a local rate of 12% (in Ruritanian kronors) and maintain a debt ratio of 40% for Ruritanian projects in line with its debt ratio of 40% in NZ The inflation rate is 1% in NZ and 8% in Ruritania . . . Required: (a) Estimate the cost of equity in NZ dollar terms for Pipi's possible Ruritanian project. (7 marks) (b) Estimate the cost of capital (WACC) in NZ dollar terms for Pipi's possible Ruritanian project (4 marks) (c) Estimate the cost of equity in Ruritanian kronor terms for the Ruritanian project. (2 marks) (d) Estimate the WACC in Ruritaniaian kronor terms for the Ruritaniaian project (2 marks) TOTAL: 15 MARKS
