Risk-Free Rate in Greece
Question for all the valuation experts on here.
I am building a model for a company based in Greece. I have been gathering discount rates assumptions and the MD strongly disagreed with some of my assumption (to say the least).
rfr - I used the German 10 year bond - Rationale: Greece is definitely not risk free and I do not want to artificially lower my MRP (assuming a beta of 1.2) by using a higher yielding bond (Greece).
Expected Return: Greek Index average return - as per Aswath - Rationale - The investment is in a Greek equity so therefore the investor will require a typical return on a Greek Equity.
Bottom line: An investor investing in Europe (with EURO) has the opportunity to invest in German bonds without taking on additional currency risk (EURO) and needs to be compensated for the additional risk associated with Greek equity. His point was the company is in Greece and you therefore use the Greek rfr and MRP should be fixed at historical average spreads. I completely disagree.
What do you guys think?
You should use the German rate as the risk free rate and apply Damodaran's country risk premium for Greece to the cost of equity. To the extent that you consider the cost of debt, you should apply Damodaran's ratings based default spread of Greece to that as well.
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