Problem:

A firm with a corporate wide debt-to-equity ratio of 1:3, an after tax cost of debt of 5%. The risk free rate is 3% and the rate of return of the market is 7%. The firm's beta is 1.5. and it is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required rate of return on equity is estimated to be about 12%. The after-tax cost of debt, which is raised locally, is expected to be in dollar terms, 3%.

Required:

Question 1: What is the project's weighted average cost of capital? How does it compare with the parent's WACC?

Question 2: If the project's IRR is 12% and there is a 2% country risk premium on the project, should the parent approve the project?

Note: Explain all steps comprehensively.