KBS International Corp is a company that operates in two businesses, steel and technology, and in two countries, the US and the UK. The table below summarises the revenues by business and by country (in millions): US UK Total Steel $800 $300 $1,100 Technology $600 $400 $1,000 Total $1,400 $700 $2,100 You have estimated unlevered betas of 0.90 for steel and 1.20 for technology, which are the same for the UK And the US. Equity risk premiums are 6% for the US and 7% for the UK. The US Treasury bond rate is 3% and the UK-denominated bond rate is 4%. KBS International Corp has 315 million shares, trading at $10 per share, no debt outstanding and no cash balance. The corporate marginal tax rate is 40%. Assume that KBS International Corp can hedge against foreign exchange risk.
a) Based on the information provided, estimate the cost of capital for KBS International Corp. b) Now assume that KBS International Corp plans to borrow $1.2 billion at 5% (pre-tax) to invest in its technology business in the UK. Estimate the cost of capital for the company after the debt issue and expansion.