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Valuation: International WACC – Part 2

Valuation: International WACC & Country Risk – Part 2


From June until August 2019 I have written 6 blogs on business valuation (e.g. topics: Multiples, DCF, LBO analysis, M&A analysis) and financial modelling in order to calculate enterprise value. These blogs are still available, you can find the links of the blogs at the very end of this blog.


In the upcoming months, I will write several blogs on the so called “Cost of Capital” that is used in business valuation.


I got inspired to do this after reading the book: “The real cost of capital: A business field guide to better financial decisions” (2004). The book is written by Tim Ogier & John Rugman & Lucinda Spicer. I really recommend any Corporate Finance professional to read this book, since it is so practical and well-grounded in theory!


Blogs in this sequence that I have published already (with the links);

Article 1: Valuation & Betas (CAPM)


Article 2: Valuation & Equity Market Risk Premium (CAPM)


Article 3: Is the Capital Asset Pricing Model dead ? (CAPM)


Article 4: Valuation & the cost of debt (WACC)


Article 5: Valuation & Capital Structure (WACC)


Article 6: International WACC & Country Risk – Part 1

In this seventh one in the sequence I will talk again about the “International WACC” and “country risk”.

This since this topic consists of 2 parts. Article 6 is part 1 on this topic. And this 7th one is the second and last part on this specific topic.


Consultant & Trainer: Joris Kersten


I am an independent M&A consultant and Valuator from The Netherlands.


In addition, I provide training in “Financial Modelling”, “Business Valuation” and “Mergers & Acquisitions” all over the world. This at (investment) banks, corporates and universities.


Also I provide inhouse training on request and I have two open training programs in business valuation in my home country The Netherlands.


At the very end of this blog you can find all information about my open training programs.


International WACC & Country Risk – Part 2


In my last blog: Blog 6 – “Valuation: International WACC & Country Risk – Part 1”, I have mentioned three ways to calculate the international cost of equity:


-Method 1: Global CAPM model;

-Method 2: Home CAPM model;

-Method 3: Foreign CAPM model.


And in this 7th blog I will continue on this topic with discussing two more methods to calculate the international cost of equity:


-Method 4: Relative volatility model;

-Method 5: Empirical analysis based on country credit ratings.


Moreover, after mentioning the additional ways to calculate the cost of equity, I will then show how to calculate the “international cost of debt” and subsequently the “International WACC”.


In case you have not read the previous article (part 1) on this topic yet, you can find it on the link below:


Method 4: Relative Volatility Approach


Within this model two adjustments are made to the regular CAPM model:

-A country risk is added to the risk free rate. So cash flows should not be adjusted for country risk, because you adjust the cost of capital;

-An adjustment for the relative market volatility of the country in question.

(Tim Ogier, John Rugman, Lucinda Spicer, 2004)


Relative volatility factor


The adjustment for relative volatility is based on the ratio of the volatility of the foreign stock market (so the stock market of the country of the target) in relation to the volatility of the stock market of the home country.


So if the volatility of for example the Zambian stock market is three times higher than the US market, then the adjustment coefficient that a US investor would apply to a Zambian company would be three.


Because emerging markets are typically more volatile than further developed markets, the adjustment coefficient is usually greater than one when applied to emerging markets.

(Tim Ogier, John Rugman, Lucinda Spicer, 2004)


Relative volatility model and diversification


Criticism on this model is that it ignores the benefits of international portfolio diversification.


This since it suggests that the EMRP should be increased substantially for investments in some specific markets.


And like mentioned before (in part 1 of this blog), evidence actually suggests that adding stocks from international countries to a home portfolio can actually reduce overall portfolio variability.


Moreover, more practical criticism is that for the ratio of relative volatility, by which to adjust the EMRP, there should be sufficient data. And this is not always the case in emerging markets.


And even when there is sufficient data, when an emerging market is dominated by a relatively small amount of stocks, then the measure of overall volatility will dis-proportionally reflect the risk characteristics of these stocks.

(Tim Ogier, John Rugman, Lucinda Spicer, 2004)


Method 5: Empirical analysis based on credit scores


The fifth approach consists out of empirical analysis procedures based on country credit scores.


These procedures involve regressing observed equity returns against sovereign credit scores provided by rating agencies and other sources such as “Institutional Investor” or the “Economics Intelligence Unit” (EIU).


The idea behind this approach is that there is a direct relationship between equity returns and a country’s credit score.

(Tim Ogier, John Rugman, Lucinda Spicer, 2004)


International cost of debt


Now that we have looked at 5 methods to calculate the international cost of equity, we need to take a look at the international cost of debt.


The international cost of debt is the result of three underlying variables:

-A risk free rate;

-A (risk) premium for any country risk associated with the country of the investment;

-A relevant corporate debt premium, also called a margin or spread.


Concerning the second variable; country risk premium, this must always be included. This since debt investors can not eliminate country risk trough diversification, like equity investors can.


Remember however that if the “foreign CAPM model” is used for the cost of equity, than the used risk free rate is from the foreign country already, so than the country risk premium is inside already.

(Tim Ogier, John Rugman, Lucinda Spicer, 2004)


Estimation of an International WACC


Now we have all the information to calculate the international WACC.


We can just do this in the ordinary way with using all the different components calculated.


You only need to be careful with the currency that you want to use.


For example, when you calculate a WACC for a Vietnamese company with the “Home CAPM approach”, the home currency of the investors can be used (e.g. US dollars), or the currency of the target company (in this case the Vietnamese Dong).

(Tim Ogier, John Rugman, Lucinda Spicer, 2004)


Example: International WACC calculation


Let’s assume the projected 10-year US inflation = 2.0 %


And the projected 10-year Vietnamese inflation = 8.0 %


Then a US WACC would look for example like this:

-US cost of equity = 5% (RFR) + 2.5% (CRP) + 1.1 (beta) * 5% (EMRP) = 13%

-US cost of debt = 5% (RFR) + 2.5% (CRP) + 1.5% (debt margin) = 9%

-US WACC = 13 * 0.5 (target capital structure) + 9% * (1 – 0.3) * 0.5 = 9.65%

(CRP = country risk premium)


9.65% is the discount rate that would be used to discount expected cash flows from the Vietnamese company expressed in US dollars.


And the discount rate that would be used to discount expected cash flow from the Vietnamese company expressed in Vietnamese Dong is:

1.0965 (US WACC) * (1 + 0.08) / (1 + 0.02) – 1 = 16.10%


This WACC is higher since it takes the relative high expected inflation on the Vietnamese Dong (in relation to the USD) into account.

(Tim Ogier, John Rugman, Lucinda Spicer, 2004)


Sources used for this blog


· The real cost of capital: A business field guide to better financial decisions (2004). Prentice Hall Financial Times/ Pearson Education. Tim Ogier & John Rugman & Lucinda Spicer. 9780273688747.


This book is fantastic and very practical, just a pleasure to read for every investment professional. Highly recommended! 😊


Next blog next week


In hope you liked this blog (part 2 of 2) on the “International WACC” and “Country Risk”. 😊


In my next blog I will talk about “cash flows” and the “ bubble”.


And when you have any questions in the meantime do not hesitate to contact me on:


Training Calendar on Business Valuation of Joris Kersten:


In case you like additional in class training:


In my home country The Netherlands, and abroad, I provide open training programs in “Business Valuation” and “Financial Modelling”.


The next sessions are given below:


1. Business Valuation & Deal Structuring (6 day training): 18, 19, 20, 21 and 23, 24 March 2020 @ Uden in the South of The Netherlands;

2. Financial Modelling in Excel (4 day training): 20, 21, 22, 23 April 2020 @ Uden in the South of The Netherlands;

3. Financial Modelling in Excel (5 day training): 2, 3, 4, 5, 6 February 2020 @ Riyadh in Saudi Arabia.


All info on these open training sessions can be found on:


And 130 references on my training sessions can be found on:


Trainer & Consultant: J.J.P. (Joris) Kersten, MSc BSc RAB

· 130 recommendations on his training can be found on:

· His full profile can be found on:


J.J.P. (Joris) Kersten MSc BSc RAB (1980) is owner of “Kersten Corporate Finance” in The Netherlands, under which he works as an independent consultant in Mergers & Acquisitions (M&A’s) of medium sized companies.


Joris performs business valuations, prepares pitch books, searches and selects candidate buyers and/ or sellers, organises financing for takeovers and negotiates M&A transactions in a LOI and later in a share purchase agreement (in cooperation with (tax) lawyers).


Moreover, Joris is associated to ‘AMT Training London’ for which he provides training as a trainer and assistant-trainer in Corporate Finance/ Financial Modelling at leading investment banks in New York, London and Hong Kong.


And Joris is associated to the ‘Leoron Institute Dubai’ for which he provides finance training at leading investment banks and institutions in the Arab States of the Gulf.


In addition, Joris provides lecturing in Corporate Finance & Accounting at leading Universities like: Nyenrode University Breukelen, TIAS Business School Utrecht, the Maastricht School of Management (MSM), the Luxembourg School of Business and SP Jain School of Global Management in Sydney.


Moreover, he provides lecturing at partner Universities of MSM in: Peru, Surinam and Mongolia. And at partner Universities of SP Jain in Dubai, Mumbai and Singapore.


Joris graduated in MSc Strategic Management and BSc Business Studies, both from Tilburg University. In addition, he is (cum laude) graduated as “Registered Advisor Business Acquisitions” (RAB), a 1-year study in the legal and tax aspects of M&A’s. And Joris obtained a degree in “didactic skills” (Basic Qualification Education) in order to lecture at Universities.


Currently Joris is doing the “Executive Master of Business Valuation” to obtain his title as “Registered Valuator” (RV) given out by the “Netherlands Institute for Registered Valuators” (NIRV). This title will enable Joris to give out business valuation judgements in for example court cases.


J.J.P. (Joris) Kersten, MSc BSc RAB. Email: Phone: +31 6 8364 0527


Earlier blogs on “Business valuation to Enterprise Value”


From June until August I have written the following blogs on valuation:


1) LBO Analysis:


2) M&A Analysis:


3) Discounted Cash Flow Valuation:


4) Valuation Multiples 1 – Comparable Companies Analysis:


5) Excel Shortcuts & Business Valuation:


6) Valuation Multiples 2 – Precedent Transaction Analysis:


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