Nestlé of Switzerland Revisited. Nestlé of Switzerland is revisiting its cost of

Question

Nestlé of Switzerland Revisited. Nestlé of Switzerland is revisiting its cost of equity analysis in 2014. 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 0.50%. The Swiss equity markets have been averaging 8.80%

returns, while the Financial Times global equity market returns, indexed back to Swiss francs, is at 9.35%.

Nestlé's corporate treasury staff has estimated the company's domestic beta at 0.947,

but its global beta (against the larger global equity market portfolio) at 0.493.

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

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

Explanation / Answer

Cost of Equity based on domestic portfolio = Rf + Beta* MRP = 0.5% + 0.947*(8.8%-0.5%) = 8.3601 %

Cost of Equity based on global portfolio = Rf + Beta * MRP = 0.5% + 0.493*(9.35%-0.5%) = 4.863 %

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