risk adjusted discount rate

sessiljoseph
Good Student
Posts: 22
Joined: Sat Apr 26, 2014 7:29 am

risk adjusted discount rate

Postby sessiljoseph » Mon Apr 28, 2014 7:12 am

a global investor decides to invest in india with arisk premium of 5% india seems to be the choice for this risk investor the investor picks up a firms asset for investment, the firm has a default spread of 1.6% and a t-bill rate of that country is 5% and the risk premium is8% estimate the cost of equity and the required return on equity and the cost debt of the firm(assume beta levered=1.8)

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

risk adjusted discount rate

Postby edupristine » Tue Apr 29, 2014 6:31 am

Could you please give the source of the question.

sessiljoseph
Good Student
Posts: 22
Joined: Sat Apr 26, 2014 7:29 am

risk adjusted discount rate

Postby sessiljoseph » Tue Apr 29, 2014 9:50 am

i took it from the quiz from foundation of risk management

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Postby edupristine » Tue Apr 29, 2014 12:14 pm

Cost of debt: Rf + Default premium = 5% + 1.6% = 6.6%
Cost of Equity: Rf + Beta*(Risk Premium) = 5% + 1.8*(8%+5%) = 28.4% (There are two premiums, one is country premium another is Market premium, here country beta is not given separately.)


Return to “CFA Level I”



cron

Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.