Scenario: You are the treasurer of Foods Unlimited, a fictional ready-to-eat food manufacturer in Great Britain. The table below provides the correlations among Foods Unlimited, the Great Britain stock market index, the world market index, and the standard deviations (SD) of returns and the expected returns (). The risk-free rate is 6.5%.
| Correlation Coefficients |
|
Foods Unlimited |
Great Britain |
World |
SD (%) |
)/Main/CourseMode/Thread/image.gif) (%) |
| Foods Unlimited |
1.00 |
0.67 |
0.50 |
24 |
? |
| Great Britain Stock Market Index |
|
1.00 |
0.81 |
17 |
11 |
| World Market Index |
|
|
1.00 |
12.6 |
7 |
Your Task: Perform the following calculations.
- Calculate Foods Unlimited's domestic country beta and world beta. What do these betas measure?
- Assume that the Great Britain stock market is segmented from the rest of the world. Using the CAPM paradigm, estimate Foods Unlimited's equity cost of capital.
- Assume now that Foods Unlimited has made its shares tradable internationally through a cross-listing on the American Stock Exchange. Using the CAPM paradigm, estimate Foods Unlimited's equity cost of capital. Discuss the possible impacts of the international pricing of Foods Unlimited shares on the domestic share prices and the firm's investment decisions.