Assume that Walmart is considering opening a store in Argentina.Argentina is rate BB-, and its dollar-based bonds trade at adefault spread of 3% over the US treasury bond rate of 6.5%. TheArgentine equity market is 1.8 times more volatile than theArgentine long-term bond market. Walmart has a beta of 0.9 (alreadyrelevered to account for the Argentinian tax rate of 35% andArgentinian D/E ratio). The market risk premium in the UnitedStates is 5.5%. The firm intends to borrow in Argentina at a localrate of 12% (in pesos) and maintain a debt ratio of 25% forArgentine projects. You can assume that the inflation rate in theUnited States is 3% whereas it is 9% in Argentina.
(a)    Explainwhat we mean by “the inflation rate†in the above description.
(b)Â Â Â Â Estimatethe cost of equity and the cost of capital in dollar terms for theArgentine store.
- Estimate the cost of equity and capital in peso terms of theArgentine store.
