Cost of Equity for Multinational Companies
Hi, I was asked in an interview how to calculate the cost of equity for multinational companies.
My response was I would calculate different cost of equity numbers for different areas separately, and take an weighted average of those numbers. The weights would be based on the MNC's business operation in each area. The interviewer said it was an "ok" answer.
What is the right way in practice?
Thanks!
What you would do is to find comparable companies' beta, and unlever them using the Hamada equation.
Depending on the data set, you can use average or median figures.
Take that figure and lever it out again with the MNC D/E ratio - now you have the levered beta of the MNC.
Ke = rf + B(rm-rf)
Voila.
Your answer is right, but I think they may have just wanted you to go into more detail on how you would have come up with the cost of equity in each of the regions. For example, with regard to their operations in Germany, how would you have calculated the cost of equity in Germany? You would take the Rf there based on whatever you wanted to use, add in the equity risk premium, etc.
Grindstone, your solution doesn't work since revenues for various multinationals wouldn't be the same in various regions. What you're proposing is not comparable or relevant to the question.
Placeat velit voluptatem placeat iusto. Placeat saepe et culpa aliquid sed recusandae. Ex ea culpa dolores quasi doloremque dolore dolor. Et quidem dolores aut error laudantium quod iste.
Ipsam sed maiores earum repellendus fugit. Labore pariatur nesciunt velit ullam ut enim.
Optio ut qui repudiandae. Quo a necessitatibus voluptate atque quas. Dicta perspiciatis pariatur nobis consequatur odit et et. Natus neque architecto voluptatem eius. Iure sit dolorem et eum et dolorem ad sed.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...