Module II· Cost of Equity & CAPMIntermediate
Question
What is the country risk premium (CRP), and when do you apply it?
Answer
Mechanics
The CRP is the additional return investors demand for country risk beyond the developed-market ERP.
Applied to
- Targets in emerging markets (Brazil, Turkey, India).
- Developed-market targets with high EM exposure (e.g. a European manufacturer with 60% of revenue in Turkey).
Estimation
Sovereign CDS spread or Damodaran's CRP tables.
Deep diveShow more details
Example
Turkey CRP about 6%, Brazil about 4%.
Application formula
```
CoE = Rf + β × (ERP + CRP)
```
Developed-market targets themselves have CRP = 0 (AAA-rated sovereigns). For multi-country businesses, use a revenue-weighted CRP.