Cost of Equity: International Considerations
According to the Grinold-Kroner macroeconomic model, an estimate of the forward-looking ERP for the foreign economy is *closest* to:
Correct!
The Grinold-Kroner macroeconomic model for estimating forward-looking ERP is defined by the following formula:
$$ ERP = (\text{Dividend yield} + \text{Change in P/E} + \text{expected inflation} + \text{growth in real EPS} - \text{percentage change in shares outstanding}) - r_f $$
Substituting the estimated values:
$$ ERP = (2.8\% + [-2.0\%] + 5.2\% + 1.5\% - 0.5\%) - 1.8\% $$
$$ ERP = 5.2\% $$
Not quite.
This answer could be the result of incorrectly accounting for the expected growth rate in the P/E.
Incorrect.
This answer could be the result of failing to account for the risk-free rate in the foreign country.
5.2%.
8.0%.
10.2%.
