Question
Wild Hockey (WH), a US based firm, is considering an investment in Canada to produce hockey equipment. WH plans to borrow 40% of the required
Wild Hockey (WH), a US based firm, is considering an investment in Canada to produce hockey equipment. WH plans to borrow 40% of the required funding needs from the Bank of Montreal at a 4.35% interest rate (denominated in Canadian dollars).
In order to estimate the cost of capital, WH has identified a similar Canadian company as a proxy to identify risk characteristics: Ruperts Hockey Supplies.
Project risk information:
Co-variance of Ruperts stock and US Stock market = 0.60
Variance of the US stock market = 0.44
Expected average annual inflation rate:
United States: 2.2%
Canada: 1.5%
Market Information:
Current exchange rate: USD 0.7850 = CAD 1
Risk-free rate (US): 3.0%
Expected market risk premium (US): 6.0%
Tax rate for WH 21%
What is the cost of capital for this project?
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