9.4 CONCLUSION. The value of a firm is a function of the same inputs—cash
flows and discount rates—for an emerging market firm as it is for a developed mar-
ket firm. There are, however, thorny estimation issues that can make emerging mar-
ket firm valuation much more complicated than the valuation of developed market
firms. We considered first the estimation of a discount rate in absence of a riskfree
rate and the paucity of historical information. When the local government has default
risk, you can either try to estimate a riskless rate or do your valuation in a different
currency—one in which a riskless rate does exist. To estimate risk premiums, you can
also fall back on a premium estimated for a mature market and adjust it for country
risk or you can estimate an implied premium. For betas, the best solution is to use the
betas of comparable firms, even though they might be traded on other markets. In the
second part of this paper, we examined how best to estimate cash flows. The earnings
reported by emerging market firms may have to be adjusted both for the misclassifi-
cation of items (like leases) and for manipulation. To estimate reinvestment needs,
when both net capital expenditures and working capital needs are volatile, you should
look at normalized values.
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9 • 38 VALUATION IN EMERGING MARKETS