A Consistent Methodology for the Calculation of the Cost of Capital in Emerging Markets
23 Pages Posted: 24 Aug 2010
Date Written: July 30, 2010
This article presents in a rigorous manner a methodological approach for the calculation of the discount rate in emerging markets. This calculation requires a robust estimation of country risk. In addition, it requires to identify explicitly and rigorously the academic relationship between the WACC (Weighted Average Cost of Capital) methodology and the CAPM (Capital Asset Pricing Model). Finally, is demonstrated that by being consistent with the assumptions, the outcome of the discount rate calculation by the two previous alternatives must be consistent.
Keywords: CAPM, Opportunity Cost, Discount Rate, Country Risk, Present Value, WACC, Emerging Markets
JEL Classification: F21, F37, G15, G24, G31
Suggested Citation: Suggested Citation