Nestlé of Switzerland Revisited. Nestlé of Switzerland is revisiting its cost of equity analysis. 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 0.57%. The Swiss equity markets have been averaging 7.80% returns, while the Financial Times global equity market returns, indexed back to Swiss francs, stands at 8.31%. Nestlé's corporate treasury staff has estimated the company's domestic beta at 0.836, but its global beta (against the larger global equity market portfolio) at 0.486. a. What is Nestlé's cost of equity based on the domestic portfolio for a Swiss investor? b. What is Nestle's cost of equity based on a global portfolio for a Swiss investor?

Nestlé of Switzerland Revisited. Nestlé of Switzerland is revisiting its cost of equity analysis. 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 0.57%. The Swiss equity markets have been averaging 7.80% returns, while the Financial Times global equity market returns, indexed back to Swiss francs, stands at 8.31%. Nestlé's corporate treasury staff has estimated the company's domestic beta at 0.836, but its global beta (against the larger global equity market portfolio) at 0.486. a. What is Nestlé's cost of equity based on the domestic portfolio for a Swiss investor? b. What is Nestle's cost of equity based on a global portfolio for a Swiss investor?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A bank is considering adding secuirtt underwriting services to the services it offers. It has estimated that the expected return and standard deviation of its traditional service are 8% and 10% respectively. It has estimated that the expected return and standard deviation of its new securities underwriting services are 16% and 20% respectively. The correlation between these services has been estimated to be -.3 and the bank estimates that 80% of its business will be from traditional services and 20% from the new services. What is the standard deviation of the new combined firm? A) 7.8% B) 10% C) 12% D) 15.5% E) 20%
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Provide Answer
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Long-Term Capital Management (LTCM) implemented a convergence trading strategy involving corporate bonds and U.S. Treasuries. Expecting the spread between corporate bond yields and Treasury yields to narrow over time, LTCM took large leveraged positions, going long (buying) corporate bonds and short (selling) Treasuries. However, the 1998 Russian debt crisis triggered a flight to quality, causing corporate bond prices to fall and Treasury prices to rise, leading to a divergence of the spreads and massive losses for LTCM's trades. On July 1, 1998, LTCM initiated a convergence trade by going long $100 million notional of Baa-rated 10-year corporate bonds with a yield of 7.5% and coupon rate of 7%, and shorting $100 million notional of 10-year U.S. Treasury bonds with a yield of 5.5% and coupon rate of 5%. a. Explain LTCM's rationale for going long corporate bonds and short Treasuries in their convergence trade. What were the underlying assumptions behind this strategy? b. Calculate…
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Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $63 million at the end of next year. a. If Roybus has 32 million shares outstanding and a weighted average cost of capital of 13.8%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.

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