Assume the Following Information for Pexi Co

question 17

Multiple Choice

Assume the following information for Pexi 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 Pexi's cost of dollar-denominated equity?

• A) 12.0%.
• B) 11.2%.
• C) 10.0%.
• D) 7.2%.

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Definitions:

Conjunction Fallacy

A logical error where people wrongly assume that specific conditions are more probable than a single general one.

Framing Error

A cognitive bias where information is presented or perceived in a way that influences judgment and decision-making, potentially leading to incorrect conclusions or actions.

Representativeness Heuristic

A cognitive bias in decision-making where the likelihood of an event is estimated based on how much it resembles existing stereotypes or patterns.

Availability Heuristic

A cognitive bias where people overestimate the importance or frequency of information that is readily available to them.