Use the Following Information to Answer the Question(s)below

question 47

Multiple Choice

Use the following information to answer the question(s) below.
Hammond Motors is considering an investment in the Euro area.The expected free cash flows,in euros,are uncorrelated with the spot exchange rate and are as follows: The new project,which Hammond is considering,has similar dollar risk to Hammond's other projects.Hammond knows that its overall dollar WACC is 10%,so it feels comfortable using this WACC for the project.The risk-free interest rate on dollars is 4% and the risk-free interest rate on euros is 6%.Hammond is willing to assume that capital markets in the United States and the Euro area are internationally integrated.
-Hammond's Euro WACC is closest to:

• A)7.9%.
• B)8.7%.
• C)10.2%.
• D)12.1%.

---

Definitions:

Technological Obsolescence

The state of being outdated or no longer used due to the development of newer and more effective technologies.

Global Competition

The competitive dynamics between companies, industries, or countries on an international scale.

Unionized Organizations

Workplaces where employees are members of a union, a collective organization that negotiates wages, working conditions, and benefits on their behalf.

Collective Agreement

A written contract negotiated between an employer and a union representing the employees, outlining terms of employment, salaries, and working conditions.