Wacc and Currency Difference


Like some guidance.
Assuming operating cashflows (payment to suppliers and revenue from customers) are denominated in Indonesian rupiah. But borrowings are made in US dollars (for simplisticity, say borrowing cost in US dollars is 4%). How should I compute my cost of debt and cost of equity in wacc?
Can I compute cost of equity using capm and using Indonesian riskfree rate, etc but cost of debt using the US dollar denominated cost of debt?

I would say since you are expose to indo currency you’d want to value the business in indo currency.

As for the debt, you would need to estimate what a normal debt/equity ratio is for a going-concern and then use a bond rate in indo + the CDS spread for indonesia.

The equity risk premium should be all in indo since your business doesn’t earn in USD.

If the business did have USD exposure, then,
Total ERP indo = ERPus * (vol equity_indo / vol_us equity)


(ERP_US + country risk premium_indo) = ERP_indo x % of US exposure

My two cents

This is a delicate situation. The issue isnt just the interest rate for the debt, that is linked to the currency. It is also inflation.

You want to compute your wacc in whatever currency your cash flows are in, otherwise the inflation mismatch between the two will get you the wrong valuation.

If inflation is high, then consider computing your cash flows in real terms rather than nominal. Then you’ll be able to adjust your wacc easily and have consistent discounting.