Risk free rate (DevMarket and EM)
Hey,
I recently got the following interview question: what would you use as you risk-free rate to compute the WACC assuming the asset is based and generates all its cash flows in a developed (developing) market?
My answers were (for the developed market): 10Y government bond, because
- low probability of default (PD~0)
- Liquid asset (trade-able)
- Industry standard
Apparently the answer itself was okay, the reasoning behind it not so much.
I’m keen to know what you would have answered and how you would justify it (different maturity, 30Y?).
What would you use for a developing market (e.g. O&G company in Venezuela).
Cheers