You are estimating the cost of equity of a company in Peru. The company's beta...
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You are estimating the cost of equity of a company in Peru. The company's beta is 1.30. Moody's rating for Peru is Baa3. Peru's equity market volatility is 35% (per annum). while its bond market volatility is 20%. U.S. equity risk premium is 4.24% and risk-freeinterest rate is 2.00%.
a) (4 points) Estimate the company's cost of equity (in US dollars), using the methodof default spread with relative standard deviations. (Note: refer to the notes foradditional information you need.)
b) (3 points) Assume U.S. inflation rate is 2.00% (per annum) and Peru's inflationrate is 3.5% (per annum), Estimate the company's cost of equity in Peru's localcurrency.
c) (3 points) In general, everything else the same, do you expect the cost of equity ofa small, private company to be higher or lower than the cost of equity of a large. public company? Explain your answe
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