Cost of equity with country risk premium

CFA Level I
#1

Hi,

I believe the textbook answer to this question is wrong for the cost of equity. They get 16.5% but I get 10.5% because I don’t think they have subtracted the risk free rate in the second term.

Have I missed something or am I right

Thanks

#2

What did you get for the country risk premium?

#3

You’re missing something. I get C as correct.

(Sovereign yield spread) *(ratio of standard deviation of equity to bond) = 3.1%.

Add this to MRP to get a total risk premium of about 9%, then multiply by beta and add Rf to get 16.286%,so 16.3%

#4

Of course. Market risk premium has already subtracted the risk free rate as it’s the premium.

Thanks