Question

Hi,

I have to value a company in CHF. Can I use the implied equity premiums from the US as a proxy for my risk premiums if I assume that equities in both countries are similiary exposed to risk? Or will I mess something up with expected inflation? I know that I do have to use a Swiss givernment as a proxy for my risk-free rate.

Thanks.

Answer 1

It should work, since the riskfree rates are close. If they were not, here is the solution. Compute the cost of equity in US dollar terms. Then convert into another currency by doing the following:
(1+ US$ Cost of equity) (1+ Exp inflation rate in Currency)/ (1+ Exp inflation in US$)

Answer 2

I don’t understand the answer Aswath, suppose that cost of equity in US is 15% and the Exp inflation rate in currency is 1.2%, and exp inflation of US is 2%, applying your formula you get:
(1+15%)*(1+1.2)/(1+2%) = 114.10%

Answer 3

Isn’t better to convert in this form:
(1+US$ Cost of Equity)*(1+Exp devaluation)-1?

Thanks

Answer 4

Some people use [(1+ Exp inflation rate in Currency)/ (1+ Exp inflation in US$)-1] to calculate devaluation, so in your formula you only forgot to substract 1... am i right?