Firm Valuation in Emerging Markets and the Exposure to Country Risk

Abstract

The goal of this paper is to propose new methods to measure the effective exposure to country risk of emerging-market companies. Starting from Damodaran (2003), we propose three new approaches: the #x201C;Prospective Lambda#x201D;, the #x201C;Retrospective Lambda#x201D; and the #x201C;Company Effective Risk Premium#x201D;. We tested our new measures of a company#x2019;s exposure to country risk on Brazilian companies listed on the Bovespa Index. The results confirm that the new approaches can be effectively applied to stable-growth companies, providing with a more reliable estimate of the premium effectively requested by investors in the past. Applying the new approaches, the cost of equity reflects the effective exposure of a company to country risk without being over- or underestimated, as is the case with other existing approaches.