Cmpute the before- and after-tax costs of its debt

Question

Case Study: GLOBAL COST OF CAPITAL:

Question 1: For component Costs:

A. Compute the before- and after-tax costs of ITS debt.

B. Compute the cost of equity (assuming all funds come from internal sources):

i. Using the constant growth Gordon Dividend Valuation Model

ii. Using the Security Market Line Equation (SML) from the Capital Asset Pricing Model (CAPM).

Question 2: Compute the Weighted Average Cost of Capital (WACC) based on cost of equity estimated under the Gordon Dividend Valuation Model.

A. Using book value weights for debt and equity

B. Using market value weights for debt and equity.

Question 3: Compute the WACC based on cost of equity estimated under the CAPM.

A. Using book value weights for debt and equity

B. Using market value weights for debt and equity

Question 4: Address the pros and cons of using market value weights versus book value weights and reconcile the divergent views of Crown and Chang.

Question 5: Compute the Required Rate of Return for the project(s), adding appropriate risk premiums subjectively. These risk premiums can differ depending on the nature and continental location of the projects.

Question 6: Make a recommendation as to which, if any, of the investments identified in Table should be accepted taking into account the capital constraint.

Table. ITS's N+6 New Projects Under Consideration (ROR Based on Book-Value weights)
Project	Net Investment Cost (US$, in millions)	Proposed Location	Estimated IRR	Type of Project	International Risk Premium	Required Rate of Return (RRR)	DECISION (ACCEPT or REJECT)
1	$500	Europe	26.30%	Existing product, new market
2	$400	USA	13.50%	New product, new market
3	$650	Asia	8.60%	Expand existing product in existing market
4	$1,500	Asia	23.40%	New product, existing market
5	$350	USA	24.60%	Replace Equipment
6	$750	Europe	10.20%	Expand existing product in existing market
7	$250	Asia	26.70%	Existing product, new market
8	$325	Asia	18.80%	New product, existing market