Cost of equity for multi-jurisdiction company/asset
Hi,
Question about discount rate for this scenario: -German listed company. -Asset is located in India. -Cash flows are in USD (due to contract structure, its paid in USD as are some costs).
For Valuation of this asset....the discount rate of cashflows, not sure what to do for the cost of equity.
1)Am I suppose to look at the cost of equity from the German company's perspective...since its their capital? But asset already built, so buyers could be from anywhere I guess. 2)The risk free rate...from what I read on this forum, debate about using US treasuries since the cash flows are in USD. But asset is located in India. German owned. 3)Equity risk premium...India due to operations there or Germany since company listed there. 4)Beta....of this German listed company vs the German index? Or Germany not applicable?
Any thoughts on any of the above would be super helpful.
There will be many opinions on this. Below my company's view. In any case: Germany is completely irrelevant.
Rf
USD dominated cash flow, so US Rf. At my bank we have chosen to multiply this with expected inflation (that matches inflation in your P&L). Can image your inflation is not per se linked to US, but unclear to me.
Beta
Always do your regressions against local index. Beta should be similar across the globe in that case.
ERP
You are linking ERP and country risk premium. In my view you rather form a view on what specifically can go wrong with this company and create scenario's for that than arbitrarily add a few % to your WACC. Some companies have hardly any correlation with the status of a state's economy. India as a country for example can go bankrupt, but if your company sells IT services to global clients there is hardly any correlation between the two. If you are e construction company in India, you would definitely have much more exposure to this event.
Hope this helps.
Thanks, this is really helpful.
For Beta, did you mean the local index of operations (India)? or did you mean the German stock company and the German index?
If its based on local index where operations are located, which company would the regression be based on.
Thanks
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