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Calcimator

Country Risk Premium Calculator

Estimate the country risk premium using Damodaran's sovereign spread approach. Compute risk-adjusted cost of equity, WACC, and valuation impact.

Inputs

%
%
%
%
%
%
%

Results

Country Risk Premium (%)

5%

Equity/Bond Volatility Ratio1.67
Base Cost of Equity (%)10%
Adjusted Cost of Equity (%)15%
CRP Equity Increment (%)5%
Base WACC (%)8.35%
Adjusted WACC (%)11.85%
WACC Increment (%)3.5%
Risk-Adjusted Discount Factor0.33
Valuation Impact (%)-27.23%
How to Use This Calculator
  1. Enter Sovereign Spread (bps), Equity Market Volatility (%), and Bond Market Volatility (%).
  2. Set Risk-Free Rate (%), Mature Market ERP (%), and Asset Beta.
  3. Adjust Debt Weight in Capital (%), Cost of Debt (%) as needed.
  4. Review the Country Risk Premium (%) (%) result.
  5. Use Equity/Bond Volatility Ratio and Base Cost of Equity (%) (%) to inform your decision.

How the result changes with Bond Market Volatility (%)

Bond Market Volatility (%)Country Risk Premium (%)
107.5%
352.14%
651.15%
900.83%

What each input means

Sovereign Spread (bps)
Credit default swap spread or bond yield spread over US Treasuries in basis points.
Equity Market Volatility (%)
Annualized volatility of the country's equity market index.
Bond Market Volatility (%)
Annualized volatility of the country's sovereign bonds.
Risk-Free Rate (%)
US Treasury or other mature market risk-free rate.
Mature Market ERP (%)
Equity risk premium for a mature market (e.g., US = 4.5-6%).
Asset Beta
Systematic risk of the specific investment.
Debt Weight in Capital (%)
Proportion of debt in the capital structure.
Cost of Debt (%)
Pre-tax borrowing cost.
Corporate Tax Rate (%)
Local corporate tax rate for tax shield.
Investment Horizon (Years)
Time horizon to measure valuation impact.

What each result means

Country Risk Premium (%)
Additional return premium for country-specific risk.
Equity/Bond Volatility Ratio
Scaling factor from Damodaran's method.
Base Cost of Equity (%)
CAPM cost of equity without country risk.
Adjusted Cost of Equity (%)
Cost of equity including country risk premium.
CRP Equity Increment (%)
How much CRP adds to the required return.
Base WACC (%)
WACC without country risk adjustment.
Adjusted WACC (%)
WACC including the country risk premium.
WACC Increment (%)
Additional WACC from country risk.
Risk-Adjusted Discount Factor
Present value factor using CRP-adjusted WACC.
Valuation Impact (%)
Percentage reduction in present value due to country risk.

How this is calculated

Worked example, using the default values

  1. Identify Input Parameters
    4 parameters
    Sovereign Spread (bps) = 300, Equity Market Volatility (%) = 25, Bond Market Volatility (%) = 15, Risk-Free Rate (%) = 4.5 = 10 input(s) provided
  2. Calculate Country Risk Premium
    Country Risk Premium = sovereignSpreadPct * volatilityRatio
    5 = 5%
  3. Calculate Equity/Bond Volatility Ratio
    Equity/Bond Volatility Ratio = equityVolPct / bondVolPct
    1.67 = 1.67
  4. Calculate Base Cost of Equity
    Base Cost of Equity = riskFreeRatePct + betaAsset * equityRiskPremiumPct
    10 = 10%

Engine last updated .

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