The appropriate method for estimating the cost of equity for a firm in a developing market is to add a country risk premium (CRP) to the market risk premium, so the revised CAPM equation becomes: ke = RF + β [E(RMKT)-RF+CRP]. The CRP is the sovereign yield spread adjusted for the volatility of the developing country's equity market. An alternative approach is to add the CRP (not the sovereign yield spread) to the cost of equity as calculated from the CAPM. The CRP is necessary because beta does not fully capture country risk. However, adjusting beta is not the recommended approach.