Is it global industry returns v/s global portfolio returns or is it stock returns v/s global index returns?
I think it is stock returns v/s global index returns, but I also remember something about using industry beta of similiar international companies against global index…so, this still needs clarification!
I am not sure if this will answer anyone’s questions… but here are my notes for cost of capital for emerging markets economies:
Cost of equity: Risk free rate + beta(market risk premium)
Risk free rate: 10 year U.S. government bond yield + (local inflation - U.S. inflation)
Beta: Average of Betas of international companies in the same industry
Market risk premium: excess return on a globally diverse protfolio over the risk free return (on average this is 4.5 - 5.5)
Cost of Debt: Normall this is the YTM on outstanding debt OR the local risk free rate (as calculated above) + U.S. credit spread on comparable debt.
Marginal tax rate: Statutory rate (the one in effect by law, hence ‘statute’), not the effective rate (what percentage of our income we actually pay in taxes)
Use global industry average equity / asset and debt / asset ratios
Favor adjusting cash flows to using country risk premium + WACC
You have to estimate the return of the industry in the emerging market and then regress on global index return. if there is significantg liquidity constraint in the emerging market industry, take a similar industry somewhere in the world and make a regression with this one. then use a 4.5 to 5.5 equity premium