L'Oreal is a well known-French MNE specializing in cosmetics and fragrances. Its 1998 sales were \(€ 10.9\) billion ( \(\$ 12\) billion), with profits of \(€ 681\) million (\$749 million), and a return on equity of \(15,1 \%\). 1'(Oreal's Chief Financial Officer is concerned about how the introduction and conversion to the curo will affect L'Oreal's weighted-average cost of capital.

As part of the Furozone (Euroland), would all firms be accorded a regional benchmark capital cost? If so, it would probably be adjusted for specific company and project risk, but probably not for country risk.

Since the introduction of the curo, the European Central Bank has determined monetary policy and thus the level of interest rates for all of Euroland. Differences in interest rares among the member countries have disappeared. This, in turn, should have an impact on the cost of equity. Furthermore, the equity markets in the Eurozone are becoming more closely correlated with each other.

a. Is the systematic risk of L'Oreal now different? How should this affect its cost of equity?

b. What does country risk mean for members of the Eurozone?

c. Track the convergence of interest rates within the Eurozone. What appears to be the benchmark risk free rate of interest?

d. Track the equity performance of Euroland firms or a Euroland share price index. Are sharcholder returns also converging?

c. Track the corrclation coefficients for equity returns among the \(11 \mathrm{mcm}\) ber countries. Are these also converging?

f. Do you expect the weighted-average cost of capital to increase or decrease for L'Orcal? Why?