The cost of equity is built on the three factors the risk-free rate, the market risk premium and a company-specific risk adjustment The most commonly...

The cost of equity is built on the three factors the risk-free rate, the market risk premium and a company-specific risk adjustment The most commonly used model for this estimate is the capital asset pricing model (CAPM) To determine the CAPM we need to estimate a risk-free rate the market risk premium and the market beta

1. a. To determine the risk-free rate, please use Treasury data from the "Select Market Data" spreadsheet On the "Yields" tab. You will find yields to maturitiesfor US and German Treasury rates For Henkel AG, which Treasury rate at which maturity is most appropriate to use in valuing the company

b. To determine Henkel's corporate beta, unlever (and relever) the ordinary least squares (OLS) market betas for each company in the European Household and Personal Care segment, Prices can be found on the 'Prices" tab of the 'Select Market Data- spreadsheet. To determine the OLS market beta, regress 10-year monthly returns against the MSCI World index denominated in the same currency. In Excel, this can be done using the 'SLOPE' formula. Next unlever the market beta using each company's year-end debt-to-equity ratio and the formula bu = be/1(+D/E). To determine Henkel's corporate beta relever the average industry beta using Henkels year-end debt - to equity ratio. Repeat this process for each of Henkel's divisions

c. Assume the market risk premium equals 5 percent