Aswath Damodaran 151
Aracruz: Cost of Equity Calculation
! We will use a risk premium of 12. 49 % in computing the cost of equity,
composed of the U.S. historical risk premium ( 4. 82 % from 28 - 03 ) and the
Brazil country risk premium of 7. 67 % (estimated earlier in the package)
! U.S. $ Cost of Equity
Cost of Equity = 10 - yr T.Bond rate + Beta * Risk Premium
= 4 % + 0. 7040 ( 12. 49 %) = 12. 79 %
! Real Cost of Equity
Cost of Equity = 10 - yr Inflation-indexed T.Bond rate + Beta * Risk Premium
= 2 % + 0. 7040 ( 12. 49 %) = 10. 79 %
! Nominal BR Cost of Equity
Cost of Equity =
= 1. 1279 ( 1. 08 / 1. 02 ) - 1 =. 1943 or 19. 43 %
!
(1+$ Cost of Equity)
(1+Inflation RateBrazil)
(1+Inflation RateUS)
" 1
The cost of equity can be stated in different currencies. When computing the
nominal BR cost of equity, we scale up the risk premium to reflect the fact the
the inflation rates (and risk free rates in BR) are much higher.
