45 14.7 United Kingdom's Vodafone Group needs a cost of capital estir an investment in Brazil's mobile phone market. Vodafone's expe in mobile phone infrastructure in emerging markets suggests that th risk of the investment from the perspective of a U.K. investor is about the as the average systematic risk of the emerging market. The U.K. risk. is fe 3 percent in pounds sterling. The world market risk premium mated to be (Erw]-rp) = 5 percent. Calculate expected or required ret in pounds on a typical Brazilian investment based on each of the folle models. of capital estimate to evaluate Vodafone's experience investing ts suggests that the systematic or is about the same he U.K. risk-free rate set risk premium is esti- a. International CAPM: E[r] = If + B(E[rw]-Ip). Vodafone estimates B = 1.2 based on a regression of Brazilian stock market returns on world market returns. b. Global and regional market factors: E[r] = rf + B(E[rwl-Ip) + 8(E[[Recion] - E[[w]), where 8 is Brazil's systematic risk relative to Latin American regional risk that is not included in the world market return. Vodafone estimates B = 1.2, 8 = 1.5, and (E[r Region - E[rw]) = 4 percent. c. Country credit risk model: E[r] = E[rw] + CR, where CR is an adjustment for credit risk in Brazil. Vodafone estimates CR = 4 percent. d. Country spread model: E[r] = E[rw] + S, where is the 1-year Brazilian gov- ernment bond yield minus the 1-year Eurocurrency yield. Currently, this sovereign yield spread is S = 2 percent. e. Modified country spread model: E[r]=+ S (Br-stocks/Br-bonds), where Br-stocks = 30 percent is the annual volatility on Brazilian stocks and Br-bonds = 10 percent is the annual volatility on Brazilian bonds