January 2019 Data Update 5: Of Hurdle Rates and Funding Costs

The cost of capital is the Swiss Army Knife of Finance, playing so many different roles that it can very quickly be used in the wrong place for the wrong reasons. In this session, I lay out how the cost of capital is the receptacle for all risk and argue that each component is responsible for conveying a different risk. The business risk is captured in a business beta, the financial leverage risk in default spreads and a leverage effect on beta, the country risk in the equity risk premium and the currency choice in the risk free rate. I also report on how costs of capital vary across companies, industries and regionally at the start of 2019.
Data on Cost of Capital:

[Михаил-дхз]

Why do you incorporate the country risk premium into the ERP? The country risk shouldn't be affected by the beta, but added separately to the CAPM. Otherwise a hypothetical zero-beta dollar-denominated investment would have the same risk in the US as in any emerging market, which is false.

[menghuancao]

Thanks so much! Very helpful explanation!