a) The Alpha Company plans to establish a subsidiary in Hungary to manufacture

a) The Alpha Company plans to establish a subsidiary in Hungary to manufacture and sell fashion wristwatches. Alpha has total assets of $70 million of
which $45 million is equity financed. The remainder is financed with debt. Alpha considered its current capital structure optimal. The construction cost of
the Hungarian facility in forints is estimated at HUF2400000000 of which HUF1800000and 000 is to be financed at a below-market borrowing rate
arranged by the Hungarian government. Alpha wonders what amount of debt it should use in calculating the tax shields on interest payments in its capital
budgeting analysis. Can you offer assistance?

b) The current spot exchange rate is HUF250/$1.00. Long-run inflation in Hungary is estimated at 10 percent annually and 3 percent in the United States. If
PPP is expected to hold between the two countries what spot exchange should one forecast five years into the future?

c) The Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equity capital is 12 percent and its before-tax borrowing rate is 8 percent.
Given a marginal tax rate of 35 percent calculate (a) the weighted-average cost of capital and

d) the cost of equity for an equivalent all-equity financed firm.