China is a manufacturing superpower. Assume that A CFO of an automobile manufacturer is looking to build a $U.S.800 million plant in China.
1. Give logical step-by-step explanation of the theory behind the concept of “required return” on proposed capital investments.
Explain how cost of equity, cost of debt, WACC, and allowances for various risk factors are involved in determining the “required return” on proposed international capital investments.
2. Discuss each of the main risk factors that should be allowed for in addition to WACC in order to determine the appropriate required return on this capital investment opportunity.
3. Make a reasonable estimate of the required return, starting with a 12% weighted average cost of capital for the U.S. auto manufacturer, and adding reasonable estimated percentages for each of the separate risk elements you can foresee.