Cost of equity with country risk premium

[rg2005]

Hi,
I believe the textbook answer to this question is wrong for the cost of equity. They get 16.5% but I get 10.5% because I don’t think they have subtracted the risk free rate in the second term.
Have I missed something or am I right

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Thanks

 

[freecfa]

What did you get for the country risk premium?

 

[tickersu]

rg2005 wrote:
Hi,
I believe the textbook answer to this question is wrong for the cost of equity. They get 16.5% but I get 10.5% because I don’t think they have subtracted the risk free rate in the second term.
Have I missed something or am I right

[/URL]
Thanks

You’re missing something. I get C as correct.
(Sovereign yield spread) *(ratio of standard deviation of equity to bond) = 3.1%.
Add this to MRP to get a total risk premium of about 9%, then multiply by beta and add Rf to get 16.286%,so 16.3%

 

[rg2005]

Of course. Market risk premium has already subtracted the risk free rate as it’s the premium.
Thanks