0.90Answer the following questions based on the stock market data given in the f

Question

0.90Answer the following questions based on the stock market data given in the following table.

The above table provides the correlations among Electricite de France (EDF), the French electricity company, the French stock market index known as the CAC40, and the world market index, together with the standard deviations (SD) of returns and the expected returns (). The risk-free rate is 5%.

* Compute the domestic country beta of EDF as well as its world beta. What do these betas measure?

* Suppose the CAC40 stock market is segmented from the rest of the world. Using the CAPM paradigm, estimate the equity cost of capital of EDF.

* If EDF decides to issue a Yankee stock offering by cross-listing new shares directly to US public investors on the NYSE, its shares will be tradable internationally. Again using the CAPM paradigm, estimate EDF’s equity cost of capital under these circumstances.

Explanation / Answer

The domestic beta and the world beta EDF can be computed as follows: Domestic Beta = (SD.EDF x SD CAC40 x Cor.EDFx CAC40)/SD^2CAC40 Domestic Beta = ((18% x 15% x (1x.90))/15%^2 1.08 World Beta = (SDEDF x SDWorld x cor.EDF x World)/SD^2 world World Beta =( (18%x 10% x (1x .60))/10%^2 1.08 Both the domestic and world beta are same. As the market moves by 1%, CAC40 stock return will move by 1.08% 2) Cost of Equity = Rf + Beta x (Rm - Rf) Cost of Equity = 5% + 1.08 x(14%- 5%) 14.72% 3) Cost of Equity = Rf + Beta x (Rm - Rf) Cost of Equity = 5% + 1.08 x(12%- 5%) 12.56%

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