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1. Define and compare capital rationing vs unlimited funds in the capital budgeting process, and describe when a firm would use capital rationing.
2. Leary Inc. has 10-year, 9 percent semiannual coupon bonds outstanding that were issued by its French subsidiary. The bonds are guaranteed by Leary. The bonds have a €1,000 face value and sell for €956.48. Leary’s tax rate is 40 percent. If the euro is expected to depreciate by 0.01739, what is Leary’s after-tax cost of foreign-denominated debt to U.S. investors?
a. 3.61%
b. 3.97%
c. 4.13%
d. 4.38%
e. 4.50%
3. Travers Inc. is a globally diverse MNE that operates in many integrated foreign markets. The firm estimates its cost of common equity using the CAPM approach. An analyst is estimating the cost of common equity for one of Travers’ foreign subsidiaries. With respect to a domestic market index (in the host country) that has an equity risk premium of 7 percent, Travers has a beta of 1.4. With respect to a world market index that has an equity risk premium of 5 percent, Travers has a beta of 1.1. If the appropriate risk-free rate for all CAPM calculations is the U.S. Treasury rate of 4 percent, how large an error would the analyst make if she used the wrong version of the CAPM?
a. 3.8%
b. 3.9%
c. 4.2%
d. 4.4%
e. 4.7%
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