Discount Rates in Emerging Markets: Four Models and An Application

The CAPM is the model most widely used to estimate required returns on equity in developed markets; and however controversial this model might be, it is widely seen as the standard. In emerging markets, by contrast, there is no single widely used model for estimating required returns on equity. This article intends to shed some light on this issue by presenting four practical and easy-to-implement models. It also illustrates the application of these models by discussing a case study in which a company in a developed market (ExxonMobil) evaluates an investment opportunity (oil exploration) in an emerging market (Argentina). The case involves the calculation of expected cash flows, the estimation of discount rates using the four models, the evaluation of the project, and the implementation of sensitivity analysis.