This assignment has 12 tasks related to topics covered in chapter 17 and 18 of the book (International Capital Structure and the Cost of Capital, and International Capital Budgeting). Solve the assignment using your preferred way (e.g. pen and paper, excel, etc.), but upload only one pdf file as a solution where you show your computations. Below you will find all the tasks you need to solve for this assignment.

Tasks

The first part of this assignment asks you to estimate the weighted average cost of capital (WACC) for Regeneron Pharmaceuticals.

As a starting point, use the REGN.xlsx file I created which you will find it as attachment on Digiex).

Assume that Regenerons optimal debt ratio (D/V) is 40%, tax rate is 30% and its cost of debt is 6%.

1) Compute the annual Beta of Regeneron (use two decimals only). Use the annual log-return for your analysis. What is the interpretation of the Beta you just computed?

2) Plot the trendline (Characteristic line).

3) Compute the annual log-return on the market portfolio (use two decimals only).

4) Compute the required rate of return (i.e. log-return on equity, r e). Use two decimals.

5) Compute the WACC (round it to the closest integer).

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Regeneron is assessing the possibility of a new investment in its factory in Norway. The aim is to expand the production of newly discovered monoclonal antibodies for the cure of Covid-19. Within three years, Regeneron wants to make this product available to everybody and to a lower cost.

The initial investment is 100 million NOK and will last for three years. Revenues forecasts are 40 million NOK for the first two years and 50 million the last year. The costs will be 8 million NOK the first year then, they reduce by 5% per year in each of the remaining two years. The investment has to be depreciated equally over the three years.

The current spot exchange rate is S0(NOK/USD) = 9 and the inflation rates in US and Norway are 1% and 2%, respectively.

A) Compute the NPV of the project in US dollars by using the WACC that you computed in task 5) as appropriate discount rate and PPP to compute future exchange rates. Should Regeneron undertake the investment?

B) Determine the APV of the project in US dollars using the PPP to compute future exchange rates. Should Regeneron undertake the investment? Assume an unlevered return on equity in US of 15%.

C) Determine the APV of the project in US dollars by computing the APV in NOK first and then convert it to US dollars using the current spot exchange rate, S(NOK/USD). For your computations, assume an unlevered return on equity in Norway of 15% and the return on debt (cost of debt) in Norway is 5%.

D) Why do the solutions in task 7) and 8) differ? Explain shortly

Suppose now that the Norwegian government has promised to arrange for a substantial portion of the initial cost to be financed at an attractive concessionary interest rate.

The conditions offered are the following:

- Regeneron can borrow 40 million NOK at a rate of 2% per year.

- The loan schedule for the principal is to be repaid in 3 equal instalments.

i) What is the percentage of the concessionary loan that Regeneron should shield?

ii) Compute the APV in USD by converting all the cash flows in USD.

iii) Compute the tax savings from the interest on debt if Regeneron could borrow 50 million NOK at the same conditions as before (2% per year and principal to be repaid in 3 equal instalments). Compare them with those computed in task 11) and comment (max 3 lines).