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option for Pretty Face would be to issue new shares to finance the investment in the...

option for Pretty Face would be to issue new shares to finance the investment in the Brazilian subsidiary. Based on the capital asset pricing model (CAPM), provide an estimate of what the cost of equity would be if shares were issued in United States, and similarly if shares were issued in Brazil. Elaborate on the factors driving the difference between the two.

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Answer #1

If equity to be raised in US , then factors in CAPM need to be US related as risk free rate , market risk premium and beta but here you need to add country risk premium for Brazil.

If you are raising equity in Brazil, CAPM includes factors related to Brazil like Brazil risk free rate , Brazil market risk premium. Here we don't need to add could try risk premium. As all caliclations are done related to Brazil markets. Whereas when you calculate at US level, you need to also account the risk associated with investment in Brazil .that's why you add Brazil country risk premium.

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