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!
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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.
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