Analyzing Financing Strategies, Cost of Capital, and Exchange Rate Risk in
International Business
1. Cost of Capital Blues, Inc., is an MNC located in the U.S. Blues would like to estimate
its weighted average cost of capital. On average, bonds issued by Blues yield 9 percent.
Currently, T-bill rates are 3 percent. Furthermore, Blues’ stock has a beta of 1.5, and
the return on the Wilshire 5000 stock index is expected to be 10 percent. Blues’ target
capital structure is 30 percent debt and 70 percent equity. If Blues is in the 35 percent
tax bracket, what is its weighted average cost of capital?
ANSWER:
First, estimate the cost of equity using the CAPM:
ANSWER:
First, estimate the cost of equity using the CAPM:
ke Rf B(Rm Rf )
3% 1.5 (10% 3%)
.135
13.5%
Next, estimate the weighted average cost of capital: