Valuation in emerging markets : how to adjust the cost of capital for country risk

Abstract

In this paper, we conduct valuations on four Argentine companies, all registered on the Buenos Aires Stock Exchange. Our goal is to investigate how to best calculate the relevant cost of capital in emerging markets. We start by thoroughly presenting the Argentine economic history and present macro-economic environment, before we present relevant theory for conducting valuations in emerging markets. We further carefully discuss theory on calculating the cost of capital and how to apply it. We take on different assumptions on the level of market integration when calculating the cost of equity, which we plug into the weighted cost of capital formula (WACC). Our valuations are conducted using the discounted cash flow-approach. Based on our results, we try to identify methods to calculate the cost of equity superior to other methods. Our valuations are based upon our own subjective assumptions and information collected by us.