International Cost of Capital Estimation: The No-Arbitrage Method
25 Pages Posted: 22 May 2018
Date Written: May 8, 2018
This study summarizes problems associated with existing international cost of capital (ICC) estimation methods; adapts long-existing arbitrage pricing methods to ICC estimation to a setting where ICC is to be estimated for a privately-held asset not traded in the capital markets; and then presents a semi-realistic example of ICC estimation for such non-traded assets under the NA method. The study contributes to the literature by more clearly defining the ICC estimation problem; provides a heretofore absent clear theoretical basis for ICC estimation; explains critical aspects of developing accurate, reliable ICC estimates; and provides a general solution to the identified problems with existing ICC estimation methods.
Keywords: No-arbitrage asset pricing, cost of capital, discount rates, valuation, international
JEL Classification: G11, G12, G32
Suggested Citation: Suggested Citation