Warsaw Bikes Inc. is a publicly traded Polish company that manufactures and sells bikes in Germany, Hungary and Poland.

Country Currency Govt Bond Rate (in local currency) Govt Bond Rate (in Euros) Passenger Revenues (in millions)

Poland Zloty 6.00% 2.25% PLN 500.00

Hungary Forint 5.00% 2.50% PLN 250.00

Germany Euros 1.00% 1.00% PLN 250.00

a) If you assume that the local currency sovereign bond ratings for each of the countries matches their foreign currency ratings, estimate the risk free rate for Warsaw Bikes, in Zlotys. (Hint: start by estimating the default spread for Poland (or Zlotys) and then get the risk-free rate.)

b) If equity markets in each of these countries is 1.5 times more volatile that the local currency government bonds, estimate the equity risk premium for Warsaw Bikes. (You can assume that Germany is Aaa rated & a mature market and that the mature market equity risk premium is 6%) (Hint: ERP is a weighted average of ERPs in each of the three currencies, where the revenue serves as the weight)