At a recent free BVR webinar, Jim Harrington and Carla Nunes (both with Duff & Phelps) went through an international case study using data and models in the 2017 Valuation Handbook: International Guide to Cost of Capital. They are co-authors (with Roger Grabowski) of the Duff & Phelps Valuation Handbook series.
One of the first decisions a valuation analyst needs to make is whether to reflect country risk in the projected cash flows or in the discount rate (or a mixture of both). Ideally, incremental country risks should be incorporated directly into the projected cash flows. But the reality is that it can be very difficult to develop projections in an international setting due to a lack of reliable data, the speakers say. That’s why most analysts end up adjusting the discount rate when attempting to capture country risk.
Several international cost of capital models are available, but it can be challenging for practitioners to find the appropriate underlying inputs. Developing robust inputs can be time-consuming and cost prohibitive for many valuation practitioners, and simply selecting an ad hoc country risk premium to the discount rate is no longer acceptable, they say. Your valuation conclusions will be more defensible if you can corroborate your estimated country risk premium with third-party sources, they say.
Duff & Phelps team members conducted a two-day free webinar series for BVR: Day 1 was on a U.S. case study on developing a WACC, and Day 2 presented a case study from the perspective of a U.S. firm acquiring a firm in Brazil.
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