Mahmoud Kamal is an analyst with Walmart, a major U.S., based discount retailer. Walmart is considering opening new stores in Brazil and wants to estimate its cost of equity capital for this investment. Mahmoud has found that:

The yield on a Brazil government 10-year U.S. dollar-denominated bond is 7.2%.

A 10-year U.S. Treasury bond has a yield of 4.9%.

The annualized standard deviation of the Bovespa Stock Exchange Index in the most recent year is 24%.

The annualized standard deviation of Brazil Government 10-year U.S. dollardenominated bond in the most recent year is 18%.

The appropriate beta to use for the project is 1.3.

The market risk premium is 6%.

The risk-free interest rate is 4.5%.

Which of the following choices is closest to the appropriate country risk premium for Brazil and the cost of equity that Mahmoud should use in his analysis?

	Country risk premium for Brazil	Cost of equity for project
A	2.5%	15.6%
B	2.5%	16.3%
C	3.1%	16.3%

You are given: Country Risk Premium = sovereign yield spread*(annualized standard deviation of equity index of developing country/annualized standard deviation of sovereign bond market in terms of the developed country). You are given:

ke = rf + (e(rm)-rf+CRP)*beta