Question

Nestlé of Switzerland Revisited. 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 0.56%. The Swiss equity markets have been averaging 7.90% returns, while the Financial Times global equity market returns, indexed back to Swiss francs, stands at 8.39%. Nestlé's corporate treasury staff has estimated the company's domestic beta at 0.913, but its global beta (against the larger global equity market portfolio) at 0.527. 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? a. What is Nestlé's cost of equity based on the domestic portfolio for a Swiss investor? % (Round to two decimal places.) b. What is Nestlé's cost of equity based on a global portfolio for a Swiss investor? % (Round to two decimal places.)

Answer 1

Answer:-

Part (a):- 7.26%
Part (b):- 4.69%

Explanation:-

Given in case of Part (a):-

Risk free Rate = 0.56%
Market return for domestic portfolio= 7.90%
Domestic Beta = 0.913

Part (a):- Nestle' Cost of Equity based on the domestic portfolio for a Swiss investor

= Risk Free Rate + Beta x (Market return - Risk Free Rate)

= 0.56% + 0.913 x (7.90% - 0.56%)

= 7.26142% OR 7.26%

Given in case of Part (b):-

Risk free Rate = 0.56%
Market return for global portfolio= 8.39%
Global Beta = 0.527

Part (b):- Nestle' Cost of Equity based on the global portfolio for a Swiss investor

= Risk Free Rate + Beta x (Market return - Risk Free Rate)

= 0.56% + 0.527 x (8.39% - 0.56%)

= 4.68641% OR 4.69%