I was doing valuation of a company in emerging markets and I have a question in mind but couldn't find a proper theory suggesting a solution.
Suppose, the company receives its revenue in US$ currency and incur costs in INR currency. The company’s functional currency is INR so the revenues are converted for the projected period at the projected exchange rates for each year.
Due to non-availability of local companies I have to choose International Cost of Capital (ICOC). Now, when I calculate cost of equity for the company I need to add Country Risk premium which embeds the impact of currency exchange rate. Further, I found Duff & Phelps article which says (1+CoE) * (Fisher Effect i.e. Inflation of INR vs USD) but it doesn’t tell any adjustment that needs to be done in Country risk premium. So it's more like counting the exchange rate impact twice. What should be done in this scenario, it will be highly appreciated if you can share you previous experience along with an article to support what you're suggesting.
(FYI: I know that I can keep the revenue in USD and convert costs to USD currency and discount at ICOC but what would you do in the above scenario other than this, how would you take the adjustment)
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