Hello fellow monkeys, I am working on a M&A model in a new country in Latam (ARG). The country has very high inflation and crazy corporate bonds yield in local currency.
I am looking for some guidance from you guys in what I should use for cost of debt. I am accounting for the local inflation in the adjusted cost of equity but I am in the dark for which cost of debt benchmark I should use. Current 8Y Sovereign bonds in local currency are trading at ~16% yield while Sovereign bonds issued in USD are trading around ~6%. Some of the contracts are in local currency and others are in USD for full disclosure.
Any guidance on the benchmark or thought process regarding WACC in a new country would be appreciated. It will obviously have a great impact on the valuation. Thanks.
Further details:
Cost of equity US: 8.59% Country Premium (damodaran): 3.68% CAPM: 12.27% Local inflation: 15% US Inflation: 2.5% Adjusted for inflation CAPM: (1.1227)*(1.15)/(1.025)=25.96%
Local cost of debt: 16% Tax: 35% After Tax 10.40%
W(d): 27.45% W(e): 72.55%
So currently Adjusted WACC: 21.69%
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Interesting situation ... would be curious to know too. Any international banking analysts out there
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