Determining the existing corporate bonds

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Q.1: ExxonMobil's existing corporate bonds are traded at the yield of 5% pa.US stock market return (RHM Exxon Mobil Corporation (stylized as ExxonMobil) is an American multinational oil and gas corporation headquartered in Irving, Texas, USA. The company is the world's largest publicly traded international oil and gas company. The firm's corporate-wide capital structure consists of 40% debt and 60% equity. Its existing long-term corporate bonds have a coupon rate of 4% pa. The following is financial information (all are measured in USD term). 

  • Yield on US government bond = 3% pa.
  • ) = 10% pa.
  • World stock market return (MSCI World Index; RWRLD) = 11% pa.
  • Cov (REXXON, RHM) / Var (RHM) = 0.90 where rEXXON is the return on ExxonMobil's common shares
  • Cov (REXXON, RWRLD) / Var (RWRLD) = 0.65 
  • US corporate tax rate = 30%

1.1. Calculate the corporate-wide WACC after tax for 2 cases; (1) assuming shareholders are able to diversify within US financial markets and (2) assuming shareholders are able to diversify in international financial markets. Explain why the costs of equity in (2) could potentially be lower than in (1).

1.2. ExxonMobil is considering an investment project in Thailand. A listed firm in Thailand has been identified as a proxy for the project. The equity betas of the proxy firm measured against US stock market and Thailand stock market are 0.75 and 0.85, respectively. The yield on Thai government bond is currently at 4% pa. Calculate the cost of equity for the foreign project assuming shareholders are able to diversify within US financial markets. Is this cost of equity denominated in USD or THB?

Reference no: EM133060557

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