Assume the Following Information for Brama Co

question 32

Multiple Choice

Assume the following information for Brama Co., a U.S.-based MNC that needs funding for a project in Germany:
U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%
What is Brama's after-tax cost of dollar-denominated debt?

• A) 7.0%.
• B) 4.9%.
• C) 8.0%.
• D) 5.6%.

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Definitions:

Generally Accepted Accounting Principles

A collection of commonly followed accounting rules and standards for financial reporting.

Earnings Manipulation

A practice where managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead stakeholders about the underlying economic performance of a company or to influence contractual outcomes that depend on reported accounting numbers.

Managers

Individuals responsible for controlling or administering all or part of a company or similar organization, making decisions regarding its operations.

Multiple-Element Sales

Transactions that involve the sale of multiple products or services for a single price, requiring allocation of revenue among the different elements.