1. Historically risk premium approach to estimate risk premium for country2. If you are triple AAA rating country you are going to use 3.88 as risk premium rate for buying

the bond of the country, we are taking 3% risk cds spread for Indian government bond, but since we are not buying government bond, we are trying to assess indian equity premium. Indian equity are going to be more riskier than indian government bond. Country risk spreadx(standard deviation of sensex/standard deviation of government bond)Should the country equity risk premium

Session 7 very important

Risk free rate is best proxy for Nominal growth rate of economy

Expected inflation + expected real interest rate=expected inflation+expected real growth rate

In assessing the cost of equity, by CAPM, Risk free rate should be the currency in which you are doing the valuation, and risk premium should be where operations are located. Say a Brazilian company is being evaluated for cost of equity in US doller, then risk free rate shall be us risk free rate and risk premium should be Brazilian risk premium

Coming to Beta

Expected return (rj)=risk free rate (rf)+b(rm-rf)

Regression equation

Rj= a+betaXrm

Regression of return of Disney with s&p 500 if Beta is 0.95, standard error 0.16,

If some body ask beta range with 67% confidence than he is asking +/- 1sigma

Amegen, Disney both have beta 0.95, i.e. unit of market risk you are exposed to, where as R2 is the proportion of the risk of stock is the market risk, i.e. not diversifiable.

Session 8

High fixed cost companies are having high Beta

Now one typical test to check weather the company is having high fixed cost or low

Caluculate % change in EBIT/% Change in Revenue, calculate for all the players in the industry, if it is lower than industry average than the company is having lower fixed cost than industry

Three determinants of Beta

A Type of business you are in, if you supplying basic necessities, your beta shall be low

B Higher the fixed cost, higher will be the beta

C Higher the financial leverage

- Regression beta we get is levered beta

Session 9

Cost of equity conversion from one currency to another currency

Suppose u have cost of equity in $

Cost of equity = 10 yr T bond rate+beta*Risk premium

20.82%

To convert to a Nominal $R Cost of equity

Cost of equity = [(1+ $cost of equity)*(1+inflation ratebrazil)/(1+inflation rateUS)]-1

- Calculating the beta for a private business…

Calculating beta using bottom up approach and up or down the food chain valuation, and calculate the total beta as owner is putting all of the saving in this business

Session 10

Cost of capital

What is debt, there are three criterial to categorise it as debt

1. Fixed contractual obligation to pay in good as well as in bad time2. Interest is tax deductible3. If you fail to pay the debt bad things happen to you