Higher education in Ethiopia: Challenges and the way forward

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Accounting and Finance


A problem multinational corporations face is determining the cost of capital in an emerging market. An international capital asset pricing model is not applicable in countries that are segmented from the rest of the financial world. The model presented in Erb, Harvey, and Viskanta (1996) can be used to resolve the problem of not having an integrated and efficient capital market to use as the basis for determining the cost of capital for a particular emerging market. We use the country credit rating model to develop an international capital market line using published country credit ratings and the returns for various equity markets. This model can be used by multinational corporation to extend the basic cost of capital model developed in Modigliani and Miller (1958) to develop a cost of capital for use in capital budgeting for countries even without stock markets, as long as the country has a credit rating.