TY - JOUR AU - Bodnar,Gordon M. AU - Dumas,Bernard AU - Marston,Richard D. TI - Cross-Border Valuation: The International Cost of Equity Capital JF - National Bureau of Economic Research Working Paper Series VL - No. 10115 PY - 2003 Y2 - November 2003 UR - http://www.nber.org/papers/w10115 L1 - http://www.nber.org/papers/w10115.pdf N1 - Author contact info: Gordon Bodnar Nitze School of Advanced International Studies John Hopkins University 1740 Massachusetts Avenue, NW Washington, DC 20036 Tel: 202/663-7731 Fax: 202/663-7718 E-Mail: bodnar@jhu.edu Bernard Dumas INSEAD boulevard de Constance 77305 Fontainebleau Cedex FRANCE Tel: +33 1 60 72 43 73 Fax: +33 1 60 72 40 50 E-Mail: bernard.dumas@insead.edu Richard C. Marston Department of Finance, Wharton School University of Pennsylvania, 2300 Steinberg-Dietric 3620 Locust Walk Philadelphia, PA 19104-6367 Tel: 215/898-7626 Fax: 215/573-2242 E-Mail: marstonr@wharton.upenn.edu AB - How does a firm in one country evaluate an investment in a firm in another country, or how does it evaluate a foreign project that the firm itself is undertaking? The firm must estimate future free cash flows just as in a domestic project, but choosing an appropriate discount rate is a particular challenge. This study examines the determinants of the discount rate for an international acquisition or project by examining the sources of risk in an international setting. These risks include stock-market price risk measured with various versions of the capital asset pricing model, as well as exchange rate risk and political risk. To measure stock market risk, both segmented and integrated models of the world equity markets are considered. The emphasis of the study is on some of the practical aspects of estimation, particular for markets where no comparable investments exist on which to base estimates of risk premiums. To show how each of these risks might be measured, the study reports estimates for a representative French firm, Thals. The estimates range widely depending on whether or not the equity market is globally integrated. ER -