Got asked this in my interview.
Basically, they asked me how to calculate cost of equity, and when i brought out CAPM, they brought up a problem with the following details
- Company's main operations (99%) in the emerging markets (e.g. Brazil)
- Listed in London Stock Exchange
- Cash flows in USD
What Risk free rate to use? Would it be different if you were buying the equity on the London Stock Exchange or buying part of it's project finance debt of it's project in Brazil,
I said the risk free rate would be the USD 10y, given that the cash is in USD and investors would seek to replicate their returns in a similar currency, but then brings about the London Stock Exchange, and...... I wasn't too sure.
Appreciate the help.