Cost of Capital in Segmented vs Integrated Markets o The cost of equity capital(Ke)of a firm is the expected return on the firm's stock that investors require This return is frequently estimated using the Capital asset Pricing Model(CaPm) R=R+B(RM-R,) COV(R,RM) where Var(Rm) McGraw-Hilylrwoin 16-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-5 Cost of Capital in Segmented vs. Integrated Markets ⚫ The cost of equity capital (Ke ) of a firm is the expected return on the firm’s stock that investors require. ⚫ This return is frequently estimated using the Capital Asset Pricing Model (CAPM): ( ) i f i RM Rf R = R + β − Var( ) Cov( , ) M i M i R R R where β =
Cost of Capital in Segmented vs Integrated Markets If capital markets are segmented. then investors can onl invest domestically. This means that the market portfolio (M)in the CaPm formula would be the domestic portfolio instead of the world portfolio R=R+B(rus-R) versus R=R+B(Rw-R) Clearly integration or segmentation of international financial markets has major implications for determining the cost of capital McGraw-Hilylrwoin 16-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-6 Cost of Capital in Segmented vs. Integrated Markets If capital markets are segmented, then investors can only invest domestically. This means that the market portfolio (M) in the CAPM formula would be the domestic portfolio instead of the world portfolio. ( )f US US Ri = Rf + βi R − R versus ( ) W f W Ri = Rf + βi R − R Clearly integration or segmentation of international financial markets has major implications for determining the cost of capital