Dravelle is determining the discount rate for a plant located in an emerging country. It starts from its pre-tax weighted average cost of capital of 8 %. The market would require a premium of 2 % for country risk, which the cash flows do not reflect. It would also require a premium of 1.5 % for raw material price risk, but the cash flows already include this risk through weighted price scenarios. The plant was financed with a subsidised loan at 3 %. Which pre-tax discount rate should be used?
- Pre-tax weighted average cost of capital (% points)
- 8 %
- Country risk premium (% points)
- 2 %
- Price risk premium (% points)
- 1.5 %
- Subsidised loan rate
- 3 %