Question #6
Reading: Reading 17 Cost of Capital - Advanced Topics
PDF File: Reading 17 Cost of Capital - Advanced Topics.pdf
Page: 2
Status: Unattempted
Correct Answer: A
Question
Candace Elwince is attempting to calculate the required return of Skeun Inc., a machine-tool manufacturer in a small Eastern European country. Elwince has solid data from the German market but is not sure how to account for the exchange-rate risk Skeun investors would face. Her best choice for creating a risk premium is the:
Answer Choices:
A. Gordon Growth model
B. difference between the inflation rates of both markets
C. difference between the bond yields of both markets
Explanation
The country spread model suggests an analyst can approximate the risk premium between
a developed market and an emerging market by subtracting the bond yields in the
developed market from yields in the emerging market.