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    Use the CAPM paridigm to estimate the equity cost of capital

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    Based on the table below, suppose that Telmex has made its shares tradable internationally via cross-listing on NYSE. Using the CAPM paradigm (p.424), estimate Telmex's equity cost of capital. Discuss the possible effects of international pricing of Telmex shares on the share prices and the firm's investment decisions. In 200- 300 words explain your answer and your rationale.

    Correlation Coefficients
    Telmex Mexico World SD (%) R (%)
    Telmex 1.00 .90 0.60 18 ?
    Mexico 1.00 0.75 15 14
    World 1.00 10 12

    The above table provides the correlations among Telmex, a telephone/communication company located in Mexico, the Mexico stock market index, and the world stock market index, together with the standard deviations (SD) of returns and the expected returns (R). The risk-free rate is 5%

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    ANSWERS
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    Given the correlation coefficient and standard deviation of the stock price of Telmex to the Mexico and World market exchanges, and a risk free rate of 5%, the computed cost of equity capital for Telmex is 5.22% and ...

    Solution Summary

    The expert uses the CAPM paradigm to estimate the equity cost of capitals.

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