Reference no: EM132918068

Question - Agility Inc., a U.S- based corporation, wants to purchase Target Corp. Agility's management believes that the country in which Target is located is segmented from global capital markets.

Assumptions: The current U.S Treasury bond rate is 3%.

The expected inflation rate in Targets country is 5% annually, as compared to 2.5% in the U.S.

The country risk premium (CRP) for targets country provided by S&P is estimated to be 2%.

Based on Targets interest coverage ratio, its credit rating is estimated to b AA. The current interest rate on AA-rated US corporate bonds is 4.5%.

Agility Inc. receives a tax credit for taxes paid in a foreign country.

Since its marginal tax rate is higher than Targets, Agility marginal tax rate of 40% is used in calculating WACC.

Agility's pretax cost of debt is 4%. the firm's total capitalization consists only of common equity and debt. Acquirers projected debt-to-debt capital ratio is 0.3.

Targets beta and the country beta are estimated to be 1.2 and 0.8, respectively.

The equity premium is estimated to be 6% based in the spread between the prospective return on the country's equity index and the estimated risk-free rate of return.

Given target Inc's current market capitalization of $3 billion, the firms size premium (FSP) is estimated at 1.0.

What is the appropriate weighted average cost of capital (WACC) Agility should use to discount Targets projected annual local currency cash flows?