The pound-based WACC for Grand Met is 12.81%, while its dollar-based WACC is 11.01%

1.748 (1.027/1.043) = 1.721185  Spot rate, expected exchange rate. This shows that the dollar is appreciating in relation to the pound. This is expected as inflation is expected to be higher in the UK. This also explains the differences in the WACC between the two countries. In order to preclude arbitrage opportunities and account for difference in inflation rates, pound-based WACC has to be higher than the dollar-based WACC.

3. As is mentioned in the case, in the footnotes on page 6, the betas for the US and UK markets are mirrored in the betas for Grand Met in the two countries. The market volatility in the US is 4% lower than the market volatility in the UK. The difference in standard deviation of returns is factored into the country’s betas, which in turn is factored into the Grand Met beta calculations. In addition to that, we are told that there is perfect correlation between the two markets, which means they move together. The difference in the betas, then, reflects the way investors approach risks: it seems that the UK investors are more risk averse than the US investors.
Additionally, we think that the differences in risk free rates in the two countries contribute to the different betas and different perceptions of risk between the US and UK investors. While the risk free rate in the US is 7.83%, the risk free rate in the UK is 9.6%. Because investors receive a higher return on their risk free investments, they demand higher returns on other investments, to compensate for risk.

4. We decided not to use all the comparable companies provided in the case, because we find some to be inappropriate for comparison. There was not one single company, however, that identically mirrored each division. Because of that, our beta for each division is an average