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Submitted By jtcoyne29
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1. Your discussion should begin with a clear and logical step-by-step explanation of the theory behind the concept of “required return” on proposed capital investments. Explain how cost of equity, cost of debt, WACC, and allowances for various factors are involved in determining the “required return” on proposed international investments.

The required rate of return is the is the minimum rate of return an investor should accept, given all options available within the capital structure of the firm. For this hypothetical situation it can be defined as the minimum acceptable return on our 800 million proposed deal in China.

The Cost of equity is defined as (Dividends per share “for next year”/ current market value of the stock) plus growth rate of dividends. That translates to the compensation the market demands in exchange for owning the asset and taking on the risk associated with owning the asset. Cost of debt is effective rate that a company pays on its current debt. In our hypothetical China deal our equity investors must see a positive return on the China venture both now and at a multiple in the future for their cost of equity to be worth it. Out cost of debt in relationship to this deal is more or less the cost of doing business in China. Stated plainly it means the infrastructure costs, plus the costs of dealing with all the local agencies in order to get the plant built.

2. Discuss each of the main risk factors that should be allowed for in addition to WACC in order to determine the appropriate return on capital on the capital investment opportunity.

The number one risk is currency risk. The Chinese government has manipulated its currency, the Yuan, lower since its inception; they were able to accomplish this by no longer pegging against the US dollar in 2005. Recently they have raised the Yuan in an effort to stave off

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