Hi all,
Imagine I’m valuing a private company that has 100% revenues in a country with a 300% inflation rate. I know the company’s cash-flows and risk-free rate should be in the same currency when I’m computing the Ke. The risk-free rate of this country (20y bond - default spread, as this country does not have a real risk-free rate) is at ~30% due to inflation. It makes sense having such a huge risk-free rate in my Ke computation because the company’s cash-flows are also huge, boosted by inflation. To calculate the market risk premium I’ll use the S&P historical return of let’s say 7% and I will have a negative market risk premium (7%-30%). However, I’ll add a country risk premium of 25% afterwards (based on the company’s default spread multiplied by the standard deviation of the country’s equity/bond market) and I’ll have a positive value again: 30% + b (7% - 30%) + 25%
Is this the correct approach?
Thanks guys!