12 McCain Foods a Canadian food processing and distribution

12. McCain Foods, a Canadian food processing and distribution company, is considering an investment in Germany. You are in McCain\'s corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in EUR, are uncorrelated to the spot exchange rate and are shown here: Year Free Cash Flow (EUR million)-25 12 4 14 15 15 The new project has similar dollar risk to McCain\'s other projects. Management at the company knows that its overall CAD WACC is 9.5% and so is comfortable us- ing this WACC for the project. The risk-free interest rate on CAD is 4.5% and the risk-free interest rate on EUR is 7% a. McCain is willing to assume that capital markets in Canada and the European Union are internationally integrated. What is the company\'s EUR WACC? b. What is the present value of the project in EUR?

Solution

WACC= RIsk free rate +Beta*(Market risk premium)

When CAD WACC = 9.5% and CAD Risk free rate is 4.5%

Then 9.5%= 4.5%+ Beta*(Market Risk Premium)

=Beta*(Market Risk Premium)= 9.5%-4.5%=5%

When the Capital market of Canada and European Union are integrated. Risk Premium will be same in Euro ,

EUR WACC= Euro risk free rate +Beta*(Market Risk Premium)

=7%+5%= 12%

B. NPV= -CF0+ CF1/(1+r)+CF2/(1+r)^2+CF3/(1+r)^3+CF4/(1+r)^4

= -25+12/(1.12)+14/(1.12)^2+15/(1.12)^3+15/(1.12)^4

=Eur 17.08 million