Question

Nestlé of Switzerland is revisiting its cost of equity analysis. As a result of extraordinary actions by the Swiss Central​ Bank, the Swiss bond index yield​ (10-year maturity) has dropped to a record low of ​%. The Swiss equity markets have been averaging ​% ​returns, while the Financial Times global equity market​ returns, indexed back to Swiss​ francs, stands at ​%. ​Nestlé's corporate treasury staff has estimated the​ company's domestic beta at ​, but its global beta​ (against the larger global equity market​ portfolio) at .

a. What is​ Nestlé's cost of equity based on the domestic portfolio for a Swiss​ investor?
b. What is​ Nestlé's cost of equity based on a global portfolio for a Swiss​ investor?

Answer 1

The numbers are missing, so I looked for similar questions to fill in the blanks:

Rf (Switzerland) = 0.54%

Rm (Switzerland) = 8.5%

Beta (Switzerland) = 0.919

Rm (global) = 9.06%

Beta (global) = 0.532

a. What is​ Nestlé's cost of equity based on the domestic portfolio for a Swiss​ investor?

Re (Switzerland) = Rf + [Beta x (Rm - Rf) = 0.54% + [0.919 x (8.5% - 0.54%)] = 0.54% + 7.32% = 7.86%

b. What is​ Nestlé's cost of equity based on a global portfolio for a Swiss​ investor?

Re (global) = Rf + [Beta x (Rm - Rf) = 0.54% + [0.532 x (9.06% - 0.54%)] = 0.54% + 4.53% = 5.07%