ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Measuring Cost of Capital

This paper highlights the complexities associated with the estimation of hurdle rates in emerging market economies and explores whether credit ratings could be used as an alternative to global CAPM for estimating equity cost of capital for valuation of projects in such economies. By adopting the log-linear country credit rating model, this paper estimates the cost of capital for 136 countries, with or without equity markets. India's low stock return correlation with the return on the global index indicates that if the residents are permitted to hold a globally diversified portfolio, they could significantly reduce their exposure to unsystematic risks. Without this the cost of equity capital (which should compensate only for systematic risk) may be higher.

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