How should business valuers measure country risk when revenues originate outside of the UK?

BVWire–UKIssue #7-1
October 1, 2019

cost of capital
cost of capital, discount rate, international business valuation, risk analysis, cost of equity

Aswath Damodaran (New York University Stern School of Business) continues to provide country risk comparisons on his website. His latest midyear 2019 update includes free spreadsheets on country risk premiums, sovereign credit default swap (CDS) spreads, corruption scores, political risk scores, and more. The UK, of course, scores relatively well on many of the risk measurement factors Damodaran reviews.

Many of his sources are not well known within the business valuation profession. For instance, he factors in interesting perspectives such as:

  • Dependence on commodities, from the United Nations Conference on Trade and Development (UNCTAD);
  • Legal risk to property rights;
  • The Global Peace Index, from the Institute of Economics and Peace;
  • Relative corruption scores, from Transparency International;
  • Other country risk services, available from the Economist, the World Bank, and the PRS Group, for example (Ireland scores as one of the least risky countries in the current PRS ranking);
  • Sovereign ratings from the usual sources (Moody’s, S&P, Fitch); and
  • Credit default and equity risk comparisons, from Bloomberg.

Damodaran continues to stress that risk is not a factor of where a company is incorporated, nor where it’s traded; what matters is where it gets its revenue. Analysts must consider country risk premia as a way to adjust either the cash flows or the discount rate when reviewing the sources of revenue, he argues.

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