Difference in cost of capital in two currencies for a firm

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The U. S.- based MNC Fairwon is contemplating a major corporate investment in Mexico to construct turbines. The level of long- term interest rates is about 6 percent higher in Mexico at 12 percent. Fairwon estimates that its USD cost of capital (for domestic projects) is about 10 percent. You have been given the task of estimating the MXN cost of capital for the project. Assume that the IFE holds and that the interest rate differential equals the inflation rate differential. Assume that this differential also helps to explain the difference in cost of capital in two currencies for a firm. (use p.pp%)

Reference no: EM13793242

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