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Secure https umassd uma sonline net webapps assessment take launch sp?course assessment d 4669 18 o use d 16 A 18 e None of the above wat p 1 c tent UES TION 2 Suppose that the British stock market is integrated with the rest of the world and Stansfield Company has made lts shares tradable internationally via the NYSE. Using the CAPM and a risk-free rate of 5%, estimate the equity cost of capital for Stansfeld cross-isting on Correlation Coefficients Stansfield England world 0.90 1.00 SD(%) 20 18 15 R% Stansfield1.00 England World 12% 10 6096 660% 0.60 0.80 1.00 14 12 e None of the above UESTION 3 Suppose that the British stock market is segmented from the rest of the world. Using the CAPM and a Stansfield sk-free rate of 5%, estimate the equity cost of capital for Correlation Coefficients Stansfield England World SD(%) R% 20 18 0.60 Stansfield 1.00 England Il 0.90 1.00 0.80 1 00 14 1.2 Save All Answ ck Save and Submit to save and submit. Click Save All Answers to save all ans

Explanation / Answer

Using international CAPM and Singer Terhaar approach,

Equity Risk Premium = Correlation with Global Market * Standard Deviation of Asset * Sharpe ratio of the market

Equity Risk Premium (ERP) = Correlation with Global Market * Standard Deviation of Asset *

( Rm - Rf) / Standard deviation of market

For question 2, For full integration,

ERP (full integration) = 0.6 * 20% * (12% - 5%)/15%

= 0.6 * 0.2 * 0.4667 = 0.056 = 5.6%

Thus, cost of capital = Risk free rate + ERP = 5% + 5.6% = 10.6%

For question 2, For full segmentation, correlation with the global market = 1

ERP = Standard Deviation of Asset * (Rm - Rf) / Standard deviation of market

= 20% * (12% - 5%)/15%
= 0.2 * 0.4667

=0.0933 = 9.33%

Thus, cost of capital = Risk free rate + ERP = 5% + 9.33 % = 14.33%

Either 14% to be approximate and None of the above to be precise

Question 4,

Cost of Equity using domestic US BEta of IBM

ke = rf + Beta * (rm - rf) = 6% + 1 * (12%-6%) = 6% + 6% = 12%

Cost of Equity using world Beta of IBM

ke = rf + Beta * (rm - rf) = 6% + 0.8 * (12%-6%) = 6% + 4.8% = 10.8%

Cost of Equity is lower by 12% - 10.8% = 1.2% in absolute terms or 1.2%/12% = 10% in percentage terms

Thus, answer is second option ( 10% lower than if US Markets were segmented)

Kindly reach out in case of any discrepancy

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