Suppose the domestic U.S.beta of IBM is 1.0,that is _U.S ? _IMB = 1.0,and that the expected return on the U.S.market portfolio is $\overline { \mathcal { R } } \text { U.S. }$ = 12 percent,and that the U.S.T-bill rate is 6 percent.If the world beta measure of IBM is _world ? _IMB = 0.80 then we can say A)that if the U.S.markets are fully integrated with the rest of the world,IBM's cost of equity capital would be 20 percent lower than if U.S.markets were segmented. B)that if the U.S.markets are fully integrated with the rest of the world,IBM's cost of equity capital would be 10 percent lower than if U.S.markets were segmented. C)that if the U.S.markets are fully integrated with the rest of the world,IBM's cost of equity capital would be one-third lower than if U.S.markets were segmented. D)none of the options

Question

Quizplus · Accepted Answer

The world beta measure of IBM is 0.8, which is lower than the domestic beta of 1.0. This suggests that IBM's exposure to systematic risk is lower in the global market than in the U.S. market. If the U.S. markets were fully integrated with the rest of the world, IBM's cost of equity capital would be lowered because the company would be diversified across a larger, less risky pool of assets. However, the exact reduction in the cost of equity capital cannot be calculated with the given information. We can only conclude that it would be 10 percent lower because the difference between the U.S. and global betas is 0.2 (1.0 - 0.8), which is 10 percent of the expected return on the U.S. market portfolio (0.2 / 2 = 0.1 or 10%).

Suppose the Domestic U R‾ U.S. \overline { \mathcal { R } } \text { U.S. }R U.S.

Suppose the Domestic U $\overline { \mathcal { R } } \text { U.S. }$