A Consistent Methodology for the Calculation of the Cost of Capital in Emerging Markets

23 Pages Posted: 24 Aug 2010

See all articles by Julio E. Villarreal

Julio E. Villarreal

Universidad de los Andes, Colombia

María J. Córdoba

Universidad de los Andes, Colombia

Date Written: July 30, 2010

Abstract

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

Villarreal, Julio E. and Córdoba, María J., A Consistent Methodology for the Calculation of the Cost of Capital in Emerging Markets (July 30, 2010). Available at SSRN: https://ssrn.com/abstract=1663845 or http://dx.doi.org/10.2139/ssrn.1663845

Julio E. Villarreal

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

María J. Córdoba (Contact Author)

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

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