Week8

1. Determine Gibson's cost of capital and required rate of return for the joint venture

in Brazil.

WACC = Proportion of debt * pre tax Cost of debt * (1- Tax rate) + proportion of

equity *post tax cost of equity

=70%*6%*(1-7%) + 30%*9%

=6.61%

Required rate of return from Joint Venture in China = WACC + risk premium for

international JV’s

=Between 6.61%+2.00% =8.61% to 6.61%+5.00% =11.61%

Thus, the required rate of return is between 8.61% to 11.61% depending upon

where the company classifies Brazil in International risk scenario. Assuming an

average level of risk, we can take an average of the range and set the required

rate of return to 10.11%

2. Determine the discrete probability distribution of Gibson's Net Present Value for

this joint venture and calculate the Expected Net Present Value.

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Problem Assignments: Global Financial Investment

Assigned

Problems

1

Ann Page Co. fixed costs $30,000 per year. Variable costs per unit are $17. Sales price per unit is $30.

a) What is the contribution margin of the product?

$13.00

Contribution margin is unit sales price less unit variable cost.

Contribution margin = Sales - Variable cost

= 30-17

Answer = $13.00

b) Calculate the breakeven point in unit sales and dollars.

Breakeven in units is

2,308

Breakeven in dollars =

$69,230.77

Breakevent point in units = Fixed cost / (Sales - variable cost)

= 30000/(30-17)

=2308...