1.

Historically risk premium approach to estimate risk premium for country

2. If you are triple AAA rating country you are going to use 3.88 as risk premium rate for buying
the bond of the country, we are taking 3% risk cds spread for Indian government bond, but
since we are not buying government bond, we are trying to assess indian equity premium.
Indian equity are going to be more riskier than indian government bond.
Country risk spreadx(standard deviation of sensex/standard deviation of government bond)
Should the country equity risk premium
Session 7 very important

Risk free rate is best proxy for Nominal growth rate of economy

Expected inflation + expected real interest rate=expected inflation+expected real growth rate
In assessing the cost of equity, by CAPM, Risk free rate should be the currency in which you are
doing the valuation, and risk premium should be where operations are located. Say a Brazilian
company is being evaluated for cost of equity in US doller, then risk free rate shall be us risk free rate
and risk premium should be Brazilian risk premium

Coming to Beta
Expected return (rj)=risk free rate (rf)+b(rm-rf)
Regression equation
Rj= a+betaXrm
Regression of return of Disney with s&p 500 if Beta is 0.95, standard error 0.16,
If some body ask beta range with 67% confidence than he is asking +/- 1sigma
Amegen, Disney both have beta 0.95, i.e. unit of market risk you are exposed to, where as R2 is the
proportion of the risk of stock is the market risk, i.e. not diversifiable.
Session 8
High fixed cost companies are having high Beta
Now one typical test to check weather the company is having high fixed cost or low
Caluculate % change in EBIT/% Change in Revenue, calculate for all the players in the industry, if it is
lower than industry average than the company is having lower fixed cost than industry
Three determinants of Beta
A Type of business you are in, if you supplying basic necessities, your beta shall be low
B Higher the fixed cost, higher will be the beta
C Higher the financial leverage
- Regression beta we get is levered beta
Session 9
Cost of equity conversion from one currency to another currency
Suppose u have cost of equity in $
Cost of equity = 10 yr T bond rate+beta*Risk premium
20.82%
To convert to a Nominal $R Cost of equity
Cost of equity = [(1+ $cost of equity)*(1+inflation ratebrazil)/(1+inflation rateUS)]-1
- Calculating the beta for a private business
Calculating beta using bottom up approach and up or down the food chain valuation, and
calculate the total beta as owner is putting all of the saving in this business

Session 10
Cost of capital
What is debt, there are three criterial to categorise it as debt
1. Fixed contractual obligation to pay in good as well as in bad time
2. Interest is tax deductible
3. If you fail to pay the debt bad things happen to you