Description:
Debentive enterprise is a company listed on the New York Stock Exchange. Its capital structure is as follows: equity issued at N.Y.S.E. USD 30,000 (after translation), in addition the company has a debt of USD 10,000 in the USA, and a debt of GBP 10,000 in Great Britain (converted to USD).
The company operates in three countries: the USA, Great Britain and Germany. Next year, the company is planning to arrange USD 10,000 to finance a project with positive NPV.
Other information is as follows:
- Risk free rate for the USA = 3.1%
- Risk premium for the US lenders = 3%
- Required rate of return (shares) in the USA = 10%
- Beta coefficient for USA shares = 1.4
- Corporate tax in the USA = 30%
- Risk free rate in Great Britain = 2.8%
- Risk premium for lenders in the UK = 2.8%
- Corporate tax in the UK = 25%
- Risk free rate in Germany = 3%
- Risk premium for lenders in Germany = 3.5%
- Corporate tax in Germany = 35%
In addition, financial analysts forecast that GBP will appreciate by 5%, and euro will rise 7% to USD.
What is more, it is expected that the economic growth in the US will accelerate, which will raise the spirits of US investors and drop of required rate of return by two percentage points.
Interest rates in the USA and the UK are poised to remain at the same level, while Germany predicts a drop of 0.5 base point.
You should consider the most beneficial method of financing Debentive:
- option 1 -issue of shares in the USA,
- option 2 -increasing its debt in the UK,
- option 3 -increasing its debt in the USA,
- option 4 - taking credit in Germany,
- option 5 - the enterprise aims at maintaining the target capital structure (current), it is advised to maintain the current structure of financing with debt/equity, and with the international dimension.