9 • 1

CHAPTER

9

VALUATION IN EMERGING MARKETS

Aswath Damodaran

New York University

CONTENTS

9.1 Introduction 2
9.2 Estimating Discount Rates 2
(a) Risk-Free Rate 2
(i) Requirements for an Asset
to Be Risk Free 2
(ii) Risk-Free Rates When
There is no Default-Free
Entity 3
(iii) Cash Flows and Risk-Free
Rates: Consistency
Principle 4
(iv) Real versus Nominal
Risk-Free Rates 4
(b) Equity Risk Premiums 5
(i) Competing Views on Risk
Premiums 5
(ii) Historical Premium
Approach:
An Examination 6
(iii) Modified Historical Risk
Premium 8
(iv) Should There Be a
Country Risk Premium? 8
(v) Measuring Country Risk
Premiums 9
(vi) Choosing Between the
Approaches 13
(vii) Estimating Asset Exposure
to Country Risk Premiums 13
(viii) An Alternative Approach:
Implied Equity Premiums 14
(c) Betas 16
(i) Historical Market Betas 16
(ii) Fundamental Betas 20
(d) From Cost of Equity to Cost of
Capital 25

(i) Calculating the Cost of

Debt 26

(ii) Calculating the Weights

of Debt and Equity

Components 28

(iii) What Is Debt? 28

(iv) Book Value versus Market

Value Debt Ratios 29

(v) Estimating the Market

Values of Equity and

Debt 29

(vi) Gross Debt versus Net

Debt 30

(vii) Estimating the Cost of

Capital 30

9.3 Estimating Cash Flows 31

(a) Earnings 31

(i) Importance of Updating

Earnings 31

(ii) Correcting Earnings

Misclassification and for

Differences in Accounting

Standards 32

(iii) Correcting for Earnings

Manipulation 32

(iv) Warning Signs in

Earnings Reports 34

(b) Reinvestment Needs 35

(i) Net Capital Expenditures 35

(ii) Investment in Working

Capital 37

9.4 Conclusion 38

SOURCES AND SUGGESTED

REFERENCES 38