Lundell Enterprises is an all-equity funded firm that operates in two businesses – publishing and entertainment – in two countries – the United States and Mexico. The breakdown of revenues (in millions of dollars) for the firm is provided below:

US Mexico

Publishing $500 $250

Entertainment $500 $750

You have collected the following information on the company:

• The unlevered beta of being in the publishing business is 0.9, whereas the

unlevered beta of being in the entertainment business is 1.20.

• The U.S. treasury bond rate is 4.5% and the ten-year Mexican government peso

bond rate is 7.5%

• Mexico is rated AA for local currency and foreign currency borrowings and the

typical default spread for AA rated countries is 0.50%.

• Mexican equity markets are twice as volatile as the Mexican government bond.
• The equity risk premium for a mature market is 4%.

a) Estimate the cost of equity for Lundell’s publishing business in the US (in US $).

b) Estimate the cost of equity in peso terms for Lundell’s Mexican entertainment operations.

Answer rating: 100% (QA)

a To estimate the cost of equity for Lundells publishing business in the US in US we can use the Cap... View the full answer