premiumof4.67%estimatedforBrazil(fromearlierinthe
chapter). The costs of equity resulting from the three
approaches described in the preceding subsection are:
Weestimatedlambdaintwoways.Inthefirst,wedividedthe
proportion of Embraer’s revenues that come from Brazil
(about3%)bytheaverageBraziliancompany’srevenuesin
Brazil(70%)toestimatealambdaof0.04.Wethenregressed
Embraer’sstockreturnsfrom 2002 to 2004 againstreturnson
the Brazilian government C-Bond (a dollar-denominated
bond) to estimate a lambda of 0.27.
39 Thelatterlooksmorereasonablethantheformerandwe
believethatthecostofequityof10.69%thatweestimated
using the lambda is the most reasonable estimate for this
company.
IfwewanttocomputethecostofequityinnominalBrazilian
real (BR) terms, the adjustment is more complicated and
requiresestimatesofexpectedinflationratesinBrazilandthe
UnitedStates.IfweassumethattheexpectedinflationinBR
is8% andin U.S.dollarsis 2%,thecostof equityin BR
terms is:
IfwewerevaluingEmbraerinnominalreals,wewoulduse
this cost of equity.