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A U.S. based MNC has the following two sets of information, one for its domestic...

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Finance

A U.S. based MNC has the following two sets of information, one for its domestic operations and one for its global operations:

Domestic:

Standard deviation of the companys return = 18% p.a.

Covariance of the companys return with the U.S. stock market returns = 270

Global:

Standard deviation of the companys return = 24% p.a.

Covariance of the companys return with the global stock market returns = 144

In addition, the following market information is available:

U.S. stock market risk premium = 12% p.a.

Standard deviation of the U.S. stock market = 20% p.a.

The risk-free rate in the U.S. = 3% p.a.

Expected return on the global stock market = 20% p.a.

Standard deviation of the global stock market = 30% p.a.

Show whether the cost of equity for domestic operations is higher or lower than that of global operations. Analyze on all levels and for all components and explain the difference in the two costs?

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