Question

You have been asked to estimate the dollar cost of equity for Rojas Holdings, a firm that has all of its operations in Mexico. The Mexican government has dollar-denominated bonds yielding 8%, and the treasury bond rate in the United States is 5%. You believe that a mature market equity risk premium is 4%. The standard deviation in the Bolsa (the Mexican equity index) is 32%, whereas the standard deviation in the Mexican government bond is 20%. Your company is in two businesses - chemicals and real estate - and derives roughly half its value from each. The unlevered beta of chemical companies globally is 1.15, and the unlevered beta of real estate is 0.60. You have 100 million shares trading at 20 pesos per share and debt outstanding of 1 billion pesos (in market value terms). Your firm faces a 30% marginal tax rate. What is the country risk premium for Mexico? A. 2.5% B. 4.8% C. 3.6% D. 4.0% E. 12%

          You have been asked to estimate the dollar cost of equity for Rojas Holdings, a firm that has all of its operations in Mexico. The Mexican government has dollar-denominated bonds yielding 8%, and the treasury bond rate in the United States is 5%. You believe that a mature market equity risk premium is 4%. The standard deviation in the Bolsa (the Mexican equity index) is 32%, whereas the standard deviation in the Mexican government bond is 20%.

Your company is in two businesses - chemicals and real estate - and derives roughly half its value from each. The unlevered beta of chemical companies globally is 1.15, and the unlevered beta of real estate is 0.60.

You have 100 million shares trading at 20 pesos per share and debt outstanding of 1 billion pesos (in market value terms). Your firm faces a 30% marginal tax rate.

What is the country risk premium for Mexico?
A. 2.5%
B. 4.8%
C. 3.6%
D. 4.0%
E. 12%

Added by Nicholas T.

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