Though Practitioners and academics rely on similar conceptual frameworks when valuing international equities in general and emerging equities in particular, they emphasize different aspects of the framework.In contrast to academics, practitioners adjust discount rates as opposed to cash flows, and use the U.S. instead of the global equity market risk premium. In this paper I propose a pragmatic approach to estimating the cost of equity for industry groups operating in African, Asian, and Latin American emerging markets and high-risk European markets as well. Grounded in observed empirical estimates, my approach has two building blocks:
1. Use of the U.S.-based Capital Asset Pricing Model (CAPM) with a beta that is designed to represent industry (instead of individual company) risk
2. An adjustment of the U.S.-based CAPM that involves assigning a certain proportion- from 35% to as much as 100%- of a company’s political risk to a specific industry.