Luther Industries, an Australian Firm, Is Considering an Investment in Japan

question 50

Multiple Choice

Luther Industries, an Australian firm, is considering an investment in Japan. The dollar cost of equity for Luther is 12%. The risk-free interest rates on dollars and yen are r_$ = 5.5% and r_¥ = 1.5%, respectively. Luther Industries is willing to assume that capital markets are internationally integrated. Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates. The yen cost of equity for Luther Industries is closest to:

• A)14.0%
• B)7.8%
• C)12.3%
• D)18.5%