Question

Hi, we have a company listed on a Country A (not the US), domiciled in Country B (Emerging Market) and the majority of the cash flows are in USD. Now when determining the Re through CAPM what should we use for the risk free rate? The risk free rate for Country A, Country B or the US rate?

Answer 1

It depends in which currency you want to value your company. If it's in USD then use the US rate, you can later add the CRP for Country B.

Answer 2

we want to value the company in the currency of country A as it is listed in that country.

Answer 3

Then you should use exchange rates to convert the cash flows to the currency of country A. There are more than 1 way to get the risk free rate, which country is letter A ?

Answer 4

it is a solid country with traded 10 year government bonds (currently yeilding 5.4%). We are obviously converting to the local currency but at the spot rate today (i.e. not using a forward curve)

Answer 5

So you use a risk free rate of 5.4% in your cost of equity computations.

Answer 6

thanks bruce