Answer problems 1-3 based on the stock market data given by the following table. Correlation Coefficients Telmex Telmex Mexico World 1.00 Mexico .90 1.00 World 0.60 0.75 1.00 SD(%) 18 15 10
? 14 12
The above table provides the correlations among Telmex, a telephone/communication company located in Mexico, the Mexico stock market index, and the world market index, together with the standard deviations (SD) of returns and the expected returns ( R ). The risk-free rate is 5%.
1. Compute the domestic country beta of Telmex as well as its world beta. What do these betas measure? 2. Suppose the Mexican stock market is segmented from the rest of the world. Using the CAPM paradigm, estimate the equity cost of capital of Telmex. 3. Suppose now that Telmex has made its shares tradable internationally via cross-listing on NYSE. Again using the CAPM paradigm, estimate Telmex’s equity cost of capital. Discuss the possible effects of international pricing of Telmex shares on the share prices and the firm’s investment decisions.
MINI CASE ONE: DORCHESTER, LTD.
Dorchester Ltd., is an old-line confectioner specializing in high-quality chocolates.
facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout Western Europe and North America (United States and Canada). With its current manufacturing facilities,
Dorchester has been unable to supply the U.S. market with more than 225,000 pounds of candy per year. This supply has allowed its sales affiliate, located in Boston, to be able to penetrate the U.S. market no farther west than St. Louis and only as far south as Atlanta. Dorchester believes that a separate
manufacturing facility located in the United States would allow it to supply the entire U.S. market and Canada (which presently accounts for 65,000 pounds per year). Dorchester currently estimates initial demand in the North American market at 390,000 pounds, with growth at a 5 percent