Question

LATAM is Latin America's biggest airline, headquartered in Chile. The company has approached you for advice on hurdle rates in its three biggest regions: Chile, Brazil, and the US. You have been given the following information on the three countries: 10-year Govt bond rate in $ 10-year gov't bond rate in local currency Standard deviation of equity market Standard deviation of 10-year gov't bond Chile 6% 8.50% 26% 16% Brazil 7% 14% 32% 20% US 2% 2% 18% 15% Assume that the (levered) beta for LATAM is 1.10 and that the equity risk premium for a mature market (US) is 5.00%. You can also assume that Chile and Brazil have local currency ratings that match their foreign currency ratings. a. Estimate the US dollar cost of equity for LATAM's Brazilian operations. b. Estimate the Chilean Peso cost of equity for LATAM's Chilean operations. a. a) 11.11%; b) 25.65% b. a) 13.3%; b) 7.15% c. a) 22.3%; b) 27.15% d. a) 16.3%; b) 17.15%

          LATAM is Latin America's biggest airline, headquartered in Chile. The company has approached you for advice on hurdle rates in its three biggest regions: Chile, Brazil, and the US. You have been given the following information on the three countries:
10-year Govt bond rate in $
10-year gov't bond rate in local currency
Standard deviation of equity market
Standard deviation of 10-year gov't bond
Chile
6%
8.50%
26%
16%
Brazil
7%
14%
32%
20%
US
2%
2%
18%
15%
Assume that the (levered) beta for LATAM is 1.10 and that the equity risk premium for a mature market (US) is 5.00%. You can also assume that Chile and Brazil have local currency ratings that match their foreign currency ratings.

a. Estimate the US dollar cost of equity for LATAM's Brazilian operations.
b. Estimate the Chilean Peso cost of equity for LATAM's Chilean operations.

a.
a) 11.11%; b) 25.65%
b.
a) 13.3%; b) 7.15%
c.
a) 22.3%; b) 27.15%
d.
a) 16.3%; b) 17.15%

Added by Katie L.

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