one quick question about this: I understand that if an emerging country “improves” (at all levels), the risk premium for investing in that country is lower, and it (without entering into calculations) lowers the cost of capital of companies located there, ok But what I don´t see is the famous link that CFA and Schweser mention that, first, equity prices go up, then expected return goes down “which lowers the cost of capital” What does the decline in expected return have to do with the cost of capital? thx
Come on…hala-madrid, you are better than that!! What is the cost of capital for equity financing??? Rings a bell some??
cost of capital goes down - therefore stock prices rise. and you don’t own stock YET. But now you purchase at the higher stock prices so your expected FUTURE return is lower than it was before the emerging country ‘improved’…
ws Wrote: ------------------------------------------------------- > Come on…hala-madrid, you are better than that!! > > What is the cost of capital for equity > financing??? Rings a bell some?? I am completely blocked (today and yesterday)… Cost of equity was a bond yield + risk premium, right? And risk premium was either 4%-6% (subjective) or the geometric mean of eq return minus bond returns, or something like that… But I don´t see expected return anywhere… thx
expected return = E®. risk premium E® - Rf lower risk premium - lower expected return cost of capital is k, which is E® from CAPM for instance or bond yields + ERP (Where ERP is determined by regression) or whatever other method
^Thanks!! Hala…what if I say that the expected return on equity is the required return for equity holder (financing)? So, if expected return is lower, so is the required return for equity financing===>lower cost of equity capital. Helps??
yes, now makes sense enough CFA for today. Time to celebrate that 200 years ago we kicked the french out of Spain 
salu2
hala_madrid Wrote: ------------------------------------------------------- > yes, now makes sense > > enough CFA for today. Time to celebrate that 200 > years ago we kicked the french out of Spain > > salu2 pfff quiter. CFAI will hunt you down
HOnestly its on 6pm in Spain…