Module II· Cost of Equity & CAPMAdvanced
Question
How do you handle the CoE for a developed-market target with significant emerging-markets exposure?
Answer
Two main approaches:
- CRP-additive: CoE = Rf + β × ERP + (revenue exposure × CRP).
Deep diveShow more details
Example
60% developed-market revenue, 40% Brazil revenue, Brazil CRP 4%. CoE adjustment = 0.40 × 4% = 1.6% additive.
- Differential cash flow: discount the EM cash flows separately at a local rate, then consolidate — cleaner, but complex. IB standard: method (1).
Careful
Don't apply the CRP twice — if EM comps were used for beta, EM risk is already partly built in.
Pitch tip
'We apply the CRP revenue-weighted: 60% developed-market × 0% + 40% Brazil × 4% = 1.6% add-on to the developed-market CoE.'