Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 492

Estimating Aracruz’s Cost of Equity

! We will do the Aracruz valuation in U.S. dollars. We will therefore use a U.S.

dollar cost of equity.

! We estimated a beta for equity of 0. 7576 for the paper business that Aracruz.

With a nominal U.S. dollar riskfree rate of 4 % and an equity risk premium of

12. 49 % for Brazil, we arrive at a dollar cost of equity of 13. 46 %

Cost of equity = 4 % + 0. 7576 ( 12. 49 %) = 13. 46 %

We used the equity beta of just the operating assets in this valuation.

If we had chosen to include the cash from financial holdings as part of

net income, we would have used Aracruzs consolidated equity beta of

0.7040.