You are trying to estimate the equity risk premium to use for Vortex, a US company that derives 80% of its revenues in Brazil and 20% in the United States

Finance Jan 17, 2021

You are trying to estimate the equity risk premium to use for Vortex, a US company that derives 80% of its revenues in Brazil and 20% in the United States. You have estimated an implied equity risk premium of 5% for the United States but don't have the inputs to estimate the implied equity risk premium for Brazil. The sovereign CDS spread for Brazil is 2% and you estimate that equities in Brazil are 1.25 times more volatile than the Brazilian government bond. What is the equity risk premium that you will use for Vortex? Select one: O a. 6.25% b. 5.5% c. 7.5% d. 7.0% e. 5%

Expert Solution

The Correct answer is 6.25%

Equity risk premium for Brazil = Equity risk premium for US * (1+Volatility)

= 5% * (1+25%)

= 6.25%

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