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Systematic risk before international diversification

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Reference no: EM133117267

The BMW company is debating the impacts of international diversification of its operations on its capital structure and cost of capital. The firm is planning on reducing consolidated debt after diversification. The following table shows the data of this firm before diversification and after diversification.

Assumptions                 

Symbols

Before diversification

After diversification

Correlation between BMW and the market

ρjm

        0.80

       0.78 

Standard deviation of BMW's returns

σj

29.0%

28.0%

Standard deviation of market's returns

σm

22.0%

22.0%

Risk-free rate of interest

krf

4.0%

4.0%

 

 

 

 

Estimate of BMW's cost of debt in US market

kd

9.0%

7.0%

Market risk premium

km-krf

6.0%

6.0%

Corporate tax rate

t

35.0%

35.0%

     Proportion of debt

D/V

30%

30%

     Proportion of equity

E/V

70%

70%

Using the above assumptions, answer the following questions:

  1. Calculate the systematic risk (beta) before international diversification?  and after international diversification? 
  2. Calculate the cost of equity before international diversification?  and after international diversification? 
  3. Calculate the weighted average cost of capital before international diversification?  and after international diversification? 

How would you describe the impact of international diversification on its costs of capital? 

Reference no: EM133117267

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