Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You have been asked to estimate the peso cost of equity for Rojas Holdings, a firm that has all of its operations in Mexico. You
You have been asked to estimate the peso cost of equity for Rojas Holdings, a firm that has all of its operations in Mexico. You decide that you will compute a dollar cost of equity first and then convert into a peso cost of equity United States is 5% and you believe that a mature market equity risk premium is 5%. The Mexican government has dollar denominated bonds ylelding 7% and peso denominated bonds yielding 11%. The treasury bond rate in the 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 terme). Your firm faces a 35% marginal tax rate. a. Estimate the levered beta for Rojas Holdings. (5 points) b. Estimate the country risk premium for Mexico. (5 point) c. Estimate the dollar cost of equity for Rojas Holdings, assuming that the average Mexican company gets 75% of its revenues in Mexico. (5 points) d. Estimate the peso cost of equity for Rojas Holdings. You can assume that the inflation rate in Mexico is 8% and the inflation rate in the U.S.is 3%. (5 point) You have been asked to estimate the peso cost of equity for Rojas Holdings, a firm that has all of its operations in Mexico. You decide that you will compute a dollar cost of equity first and then convert into a peso cost of equity United States is 5% and you believe that a mature market equity risk premium is 5%. The Mexican government has dollar denominated bonds ylelding 7% and peso denominated bonds yielding 11%. The treasury bond rate in the 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 terme). Your firm faces a 35% marginal tax rate. a. Estimate the levered beta for Rojas Holdings. (5 points) b. Estimate the country risk premium for Mexico. (5 point) c. Estimate the dollar cost of equity for Rojas Holdings, assuming that the average Mexican company gets 75% of its revenues in Mexico. (5 points) d. Estimate the peso cost of equity for Rojas Holdings. You can assume that the inflation rate in Mexico is 8% and the inflation rate in the U.S.is 3%. (5 point)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started