The BMW company is debating the impacts of international diversification of its operations on its capital structure
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Question:
- The BMW company is debating the impacts of international diversification of its operations on its capital structure and cost of capital. The firm is planning on reducing consolidated debt after diversification. The following table shows the data of this firm before diversification and after diversification.
Assumptions | Symbols | Before diversification | After diversification |
Correlation between BMW and the market | jm | 0.80 | 0.78 |
Standard deviation of BMW's returns | j | 29.0% | 28.0% |
Standard deviation of market's returns | m | 22.0% | 22.0% |
Risk-free rate of interest | krf | 4.0% | 4.0% |
Estimate of BMW's cost of debt in US market | kd | 9.0% | 7.0% |
Market risk premium | km-krf | 6.0% | 6.0% |
Corporate tax rate | t | 35.0% | 35.0% |
Proportion of debt | D/V | 30% | 30% |
Proportion of equity | E/V | 70% | 70% |
Using the above assumptions, answer the following questions:
- Calculate the systematic risk (beta) before international diversification? and after international diversification?
- Calculate the cost of equity before international diversification? and after international diversification?
- Calculate the weighted average cost of capital before international diversification? and after international diversification?
How would you describe the impact of international diversification on its costs of capital?
Related Book For
Multinational Business Finance
ISBN: 978-0133879872
14th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
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