anonymous
  • anonymous
If cost of equity for an African country is calculated as: risk free 20yr US Treasury rate + Damodaran country risk premium + levered beta * EMRP - then should the EMRP be a "global average" EMRP (e.g. 4.6% from Dimson et al) or should it be the country specific EMRP (e.g. 6.1% for South Africa from Dimson et al)?
Finance
  • Stacey Warren - Expert brainly.com
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katieb
  • katieb
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anonymous
  • anonymous
why shouldn't it be country specific?
anonymous
  • anonymous
Use the mature market global average premium or you will end up double counting...
anonymous
  • anonymous
Thanks Professor, that was my concern. However, if we do that, then aren't we in effect saying that in the African country, the difference between required return on local government bonds (20 yr UST + CRP) and required return on local stocks (20 yr UST + CRP + ERP mature) is just the ERP mature? But that seems inconsistent with the fact that in theory ERP in emerging markets should be higher than in mature markets.

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anonymous
  • anonymous
The required return on a local government bond in what currency? Dollars? If so, the answer is yes and that is because what you are using as a riskfree rate then (the $ bond rate for the government) already incorporates a risk premium.

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