CHAPTER 39
Global Cost of Capital Models1
James Harrington and Roger J. Grabowski
Sources of Information on Countries and Their Economies
Local, Single-country Version of the CAPM
The U.S. Cost of Equity Capital Adjusted for Yield Spreads Model
The U.S. Cost of Equity Capital Adjusted for Volatility Spreads Model
Local Country Risk Exposure Model
Modified Cost of Capital Model
Should Projected Net Cash Flows and the Cost of Capital Be Nominal or Real?
INTRODUCTION
Why are there any difficulties developing cost of capital estimates for companies based outside the United States? If people are everywhere alike and markets are integrated, then there is no problem. However, if markets are (entirely or partially) isolated from world markets (i.e., segmented), then we need to address the differences between the markets.
The most common adjustments made by practitioners aimed at this segmentation problem are addressed by adding ad hoc country-specific risk premiums to the cost of capital estimates. There can be no doubt that some markets are at least partially segmented. The markets for goods, services, capital, and currencies may be segmented by a host of problems, such as taxation differences, legal factors, information, and trading ...
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