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XYZ Company from Australia is evaluating a proposal from its British subsidiary ABC to build a new plant in the United Kingdom. The expected
XYZ Company from Australia is evaluating a proposal from its British subsidiary ABC to build a new plant in the United Kingdom. The expected after-tax nominal cash flows in (thousands of) pounds are as follows: Year 0 Cash Flow-740 1 2 3 200 300 350 The current spot rate is 1.80A$/. The firm's tax rate is 30%. The firm's pre-tax cost of debt in Australia is 8%; the firm's debt-to-equity ratio is 2; the beta of the firm's common stock is 1.25; the market risk premium is 8%, the yield of the long term Australian Treasury bond is 6%. Assume the term structure is flat. the Q2a. ABC forecasts that over the next three years, expected inflation for UK and Australia are 2% p.a. and 5% p.a. respectively and it believes PPP holds. Would ABC recommend going ahead with the project or not based on this information? Show the detailed calculation to justify the recommendation. (6 marks)
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