Practical Approach to estimating Cost of Equity for Valuing Private Company in Emerging Markets: The Case of Tanzania

Abstract

The growth of financial markets in emerging countries and increased influence of globalization has made the analysis and assessment of equity risk premium a critical component of equity valuation in recent years. This article attempts to pragmatically show how one can estimate the cost of equity for unquoted companies in emerging markets like Tanzania by using Capital Asset Pricing Model (CAPM). Generally, the article attempts to pragmatically estimate equity betas for selected 12 quoted companies in Tanzania using Market Model (MM). The Market Model parameters have been estimated by Ordinary Least Square (OLS) regression. The raw equity betas have been generated for the selected 12 actively traded companies on Dar es Salaam Stock Exchange (DSE) for a period of 2007 - 2016 and OLS regression estimation errors have been corrected using Vasicek’s beta adjusting model and Bloomberg’s beta adjustment model. The article has also pragmatically estimated a second key input of the CAPM; the Equity risk premium (ERP) for Tanzania and a few other selected African countries. The ERP has been estimated by using two methods: firstly, the conventional approach and secondly, the International Fisher Effect model. Finally, the Monographic article has pragmatically demonstrated how one can estimate the cost of equity for a private company in emerging markets such as Tanzania.