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 0.54​%. The Swiss equity markets have been averaging 8.50​% ​returns, while the Financial Times global equity market​ returns, indexed back to Swiss​ francs, is at 9.06​%. ​Nestlé's corporate treasury staff has estimated the​ company's domestic beta at 0.919​, but its global beta​ (against the larger global equity market​ portfolio) at 0.532.

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

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

Answer 1

Risk free Rate = 0.54%
Market return for domestic portfolio= 8.50%
Domestic Beta = 0.919

1) Nestle' Cost of Equity based on the domestic portfolio for a Swiss investor = Risk Free Rate + Beta *(Market return - Risk Free Rate) = 0.54% + 0.919 *(8.5%-0.54%) = 7.86%

Risk free Rate = 0.54%
Market return for global portfolio= 9.06%
Global Beta = 0.532

2) Nestle' Cost of Equity based on the domestic portfolio for a Swiss investor = Risk Free Rate + Beta *(Market return - Risk Free Rate) = 0.54% + 0.532 *(9.06%-0.54%) = 5.07%

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