Which of these costs of equity should we use in valuing
KristinKandy?Theanswerwilldependonwhothepotential
buyerforthefirmis.Ifthebuyerisaprivateindividualwho
planstoinvestallofherwealthinthebusiness,itshouldbe
thetotalbeta.Ifitisapubliclytradedfirm(oraninitialpublic
offering),wewouldusethemarketbeta.Sincethelatterwill
yieldalowercostofequityandahighervalue,itshouldcome
as no surprise that the best potential bidderfor a private
business will be a publicly traded company.
Companies with Country Risk Exposure
Inthesectiononriskpremiums,weconsideredthreedifferent
ways ofestimating country risk premiums. Forcompanies
withsubstantialcountryriskexposure,eitherbecausetheyare
incorporated in emerging markets or because they have
operatingexposuresinthosemarkets,itbecomescriticalthat
weadjustthecostofequityfortheadditionalriskexposure.
Ingeneral,therearethreewaysinwhichwecantrytobring
country risk exposure into the cost of equity.
Thefirst,mostwidelyusedandleasteffectivewayofdealing
withcountryriskistoaddonthecountryriskpremiumtothe
cost of equity for every companyin an emerging market.
Thus,thecostofequityforacompanyinariskycountrycan
be written as: