International cost of capital estimation
You are a well-trained finance professional working in a globalized capital market environment. You need to know the basics of estimating international cost of capital. All that is required to develop accurate, reliable estimates of international cost of capital is captured in just four equations based on a well-known theory by a well-known economist 40 years ago. And yet …
The writings of well-known authorities on international cost of capital (ICC) estimation–Campbell Harvey, Aswath Damodaran, and Roger Grabowski–suggest there are four fundamental and interrelated problems with existing ICC estimation methods:
(1) Lack of coherent theory and methods for pricing cross-border risks.
(2) Use of ad hoc risk premiums based on assumptions; not estimates.
(3) Use of nominal risk-free rates on assets that are demonstrably risky.
(4) ICC estimates that are not clearly opportunity costs of capital.
All finance professionals involved in cross-border, international asset valuation will no doubt want to consider how these problems can be solved … using a method that has existed for about 40 years.
Please read on here:
MMc
São Paulo
Caveats. Please note: (i) views presented above are my own and do not reflect those of others; (ii) like anyone, I’m not infallible and am responsible for any errors; (iii) I greatly appreciate being informed of any significant errors in facts, logic, or inferences and am happy to give credit to anyone doing so; (iv) the above article is subject to revision and correction; and, (v) the article cannot be construed as investment or financial advice and is intended merely for educational purposes. MMc
