Musings on Markets

APRIL 7, 2025

Not surprisingly, the markets opened down on Thursday and spent the next two days in that mode, with US equity indices declining almost 10% by close of trading on Friday. US equities had the biggest decline in dollar value terms, losing $5.3 Other Markets As equity markets reacted to the tariff announcement, other markets followed.

Marketability 93

Marketability Risk Premium Start-ups Equity 93

Musings on Markets

FEBRUARY 8, 2025

In the first five posts, I have looked at the macro numbers that drive global markets, from interest rates to risk premiums, but it is not my preferred habitat. In this role, the cost of capital is an opportunity cost, measuring returns you can earn on investments on equivalent risk.

Risk Premium 75

Risk Premium Beta Start-ups Equity 75

Musings on Markets

SEPTEMBER 27, 2022

In a third post on July 1, 2022 , I pointed to inflation as a key culprit in the retreat of risk capital, i.e., capital invested in the riskiest segments of every market, and presented evidence of the impact on risk premiums (bond default spreads and equity risk premiums) in markets.

Risk Premium 99

Risk Premium Treasury Start-ups Equity 99

Musings on Markets

FEBRUARY 11, 2023

In the month since, I have added two more data updates, one on US equities and one on interest rates , but my attention was drawn away by other interesting stories. Default Risk As with individuals and businesses, governments (sovereigns) borrow money and sometimes struggle to pay them back, leading to to the specter of sovereign default.

Risk Premium 97

Risk Premium Start-ups Equity Marketability 97

Musings on Markets

FEBRUARY 8, 2022

Relative Risk Measures Before we embark on how to measure relative risk, where there can be substantial disagreement, let me start with a statement on which there should be agreement. By the same token, Embraer and TCS are global firms that happen to be incorporated in Brazil and India, respectively.

Risk Premium 93

Risk Premium Beta Start-ups Equity 93

Musings on Markets

JANUARY 17, 2024

Heading into 2023, US equities looked like they were heading into a sea of troubles, with inflation out of control and a recession on the horizon. Breaking equities down by sub-region, and looking across the globe, I computed the change in aggregate market capitalization, by region: While US stocks accounted for about $9.5

Risk Premium 82

Risk Premium Start-ups Equity Dividends 82

Musings on Markets

OCTOBER 4, 2023

I looked at global equities, broken down by region of the world, and in US dollars, to allow for direct comparison: India is the only region of the world to post positive returns, in US dollar terms, in the third quarter, and is the best performing market of the year, running just ahead of the US; note again that of the $5.2

Marketability 123

Marketability Start-ups Risk Premium Treasury 123

Musings on Markets

MAY 6, 2022

Investment Consequences As the storm clouds of higher inflation and interest rates, in conjunction with slower or even negative economic growth, gather, it should come as no surprise that equity markets are struggling to find their footing. At the close of trading on May 5, 2022, the S&P 500 stood at 4147, down 13.3%

Risk Premium 103

Risk Premium Treasury Start-ups Equity 103

Musings on Markets

JULY 17, 2023

In my second data update post from the start of this year , I looked at US equities in 2022, with the S&P 500 down almost 20% during the year and the NASDAQ, overweighted in technology, feeling even more pain, down about a third, during the year. US Equities in 2023: Into the Weeds! that was lost last year.

Marketability 98

Marketability Risk Premium Start-ups Treasury 98

Musings on Markets

JANUARY 20, 2021

With equities, the metric that has been in use the longest is the PE ratio, modified in recent years to the CAPE, where earnings are normalized (by averaging over time) and sometimes adjusted for inflation. Note that nothing that I have said so far is premised on modern portfolio theory, or any academic view of risk premiums.

Risk Premium 52

Risk Premium Risk-free Rate Equity Dividends 52

Reynolds Holding

OCTOBER 22, 2024

In leveraged buyouts (LBOs), a private equity (PE) sponsor acquires controlling ownership of a target company, typically by using a significant amount of bank loans. The findings of our study have important implications for debates about the role of private equity firms.

Equity 45

Equity Risk Premium Banking Private Equity Firm 45

Musings on Markets

JANUARY 5, 2024

Beta & Risk 1. Return on Equity 1. Equity Risk Premiums 2. Costs of equity & capital 4. Valuation Pricing Growth & Reinvestment Profitability Risk Multiple s 1. Valuation Pricing Growth & Reinvestment Profitability Risk Multiple s 1. Costs of equity & capital 1.

Dividends 107

Dividends Risk Premium Equity Book Value 107

Musings on Markets

JANUARY 30, 2023

If 2022 was an unsettling year for equities, as I noted in my second data post, it was an even more tumultuous year for the bond market. Historical Context In my earlier post, I noted that US equity market performance in 2022 made it the seventh worst year in stock market history, if you go back to 1928.

Treasury 97

Treasury Start-ups Risk Premium Equity 97

Musings on Markets

AUGUST 15, 2023

Expected returns for Risky Investments : The risk-free rate becomes the base on which you build to estimate expected returns on all other investments. For instance, if you read my last post on equity risk premiums , I described the equity risk premium as the additional return you would demand, over and above the risk free rate.

Risk-free Rate 98

Risk-free Rate Risk Premium Treasury Start-ups 98

Andrew Stolz

AUGUST 5, 2020

If an investor moves money from the risk-free asset into the stock market, they should expect to earn a return in excess of the risk-free rate, what is called an equity risk premium. These risks can be reduced through the diversification of a portfolio. How Do You Calculate the Capital Asset Pricing Model?

Risk-free Rate 52

Risk-free Rate Beta Weighted Average Cost of Capital Risk Premium 52

Valutico

FEBRUARY 27, 2024

The discount rate effectively encapsulates the risk associated with an investment; riskier investments attract a higher discount rate. Different types of discount rates such as risk-free rate, cost of equity, or cost of debt, are used contextually in financial analysis.

Discounted Cash Flow 52

Discounted Cash Flow Risk Premium Risk-free Rate Beta 52

Musings on Markets

FEBRUARY 10, 2021

Cost of raising funds (capital) : Since the funds that are invested by a business come from equity investors and lenders, one way in which the hurdle rate is computed is by looking at how much it costs the investing company to raise those funds. But what if the company is looking at a project in Nigeria or Bangladesh? as mature markets.

Risk-free Rate 52

Risk-free Rate Risk Premium Start-ups Equity 52

Musings on Markets

JANUARY 24, 2024

In my last post, I looked at equities in 2023, and argued that while they did well during 2023, the bounce back were uneven, with a few big winning companies and sectors, and a significant number of companies not partaking in the recovery.

Treasury 52

Treasury Risk Premium Start-ups Risk-free Rate 52

Musings on Markets

JANUARY 6, 2023

When valuing or analyzing a company, I find myself looking for and using macro data (risk premiums, default spreads, tax rates) and industry-level data on profitability, risk and leverage. I do report on a few market-wide data items especially on risk premiums for both equity and debt. Cost of Equity 1.

Risk Premium 52

Risk Premium Dividends Start-ups EBITDA 52

Andrew Stolz

AUGUST 6, 2020

The return on assets is determined by systematic factors such as changes in inflation , risk premiums, interest rates, etc. Investors construct portfolios with unsystematic risks, which are well-diversified to reduce total portfolio risk. In theory, arbitrage provides investors with a high chance of success. 1 + RP1 + ??2+

Risk-free Rate 52

Risk-free Rate Risk Premium Beta Marketability 52

Musings on Markets

JANUARY 27, 2022

Corporate Bonds: No Shortage of Risk Capital In my last post, I chronicled the movement in the equity risk premium, i.e. the price of risk in the equity market, during 2021, but the bond market has its own, and more measurable, price of risk in the form of corporate default spreads.

Risk-free Rate 99

Risk-free Rate Treasury Price to Book Start-ups 99

Equidam

APRIL 26, 2025

For startups, particularly in technology and software sectors, the primary assets are often intangible intellectual property, skilled teams, user bases, brand equity, and growth potential. Free cash flow to equity (FCFE) is typically used, representing cash available to equity holders after all expenses, investments, and debt payments.

Discounted Cash Flow 59

Discounted Cash Flow Terminal Value Book Value Beta 59

Musings on Markets

JANUARY 31, 2024

In my last three posts, I looked at the macro (equity risk premiums, default spreads, risk free rates) and micro (company risk measures) that feed into the expected returns we demand on investments, and argued that these expected returns become hurdle rates for businesses, in the form of costs of equity and capital.

Equity 83

Equity Book Value Start-ups Corporate Finance 83

Musings on Markets

JANUARY 9, 2021

The second was that, starting mid-year in 2020, equity markets and the real economy moved in different directions, with the former rising on the expectations a post-virus future, and the latter languishing, as most of the world continued to operate with significant constraints.

Risk Premium 52

Risk Premium Market Capitalization Equity Start-ups 52

Simply Treasury

AUGUST 2, 2022

DEBRA Proposal (« Debt-Equity Bias Reduction Allowance). In early May, the European Commission unveiled its proposal for a "DEBRA" (Debt-equity bias reduction allowance) Directive, aimed at encouraging companies to finance their investments with equity and capital contributions, instead of resorting to loans (bank or other).

Equity 52

Equity Risk Premium Banking Finance 52

Andrew Stolz

MARCH 20, 2020

A firm uses a mix of equity and debt to minimize the cost of capital. In general, the cost of debt is lower than the cost of equity due to the tax advantage of debt. The cost of equity (Ke) is an expected return that a firm pays to an equity investor to compensate for the risk of investing capital.

Beta 52

Beta Capital Structure Risk-free Rate Weighted Average Cost of Capital 52

Brian DeChesare

MAY 3, 2023

And it values the company today based on the present value of its dividends and that potential future value (either the stock price or the Equity Value via the Terminal Value calculation). And Equity Real Estate Investment Trusts (REITs) must distribute almost all their Net Income, so the DDM can work well in REIT valuations.

Dividends 64

Dividends Terminal Value Enterprise Value Equity 64

Equilest

JULY 31, 2022

To evaluate a company's value, using the cash flow discounting method, the future cash flows that the firm will generate must be estimated and capitalized at a discount rate appropriate to the firm's risk. The price of equity represents the return shareholders demand on an investment in the company.

Beta 40

Beta Business Valuation Finance Discounted Cash Flow 40

Musings on Markets

FEBRUARY 15, 2023

It is to remedy this defect that analysts scale profits to invested capital, with equity and capital variants: In the equity version, you divide net income by book equity to estimate a return on equity, a measure of what equity investors are generating on the capital they have invested in a company.

Start-ups 52

Start-ups Equity Risk Premium Risk-free Rate 52

ThomsonReuters

APRIL 7, 2021

Private companies, whether you’re looking to value your business in preparation for a sale, to help raise debt or equity funding, for some other business purpose, or simply for your own edification, you’ve probably found that the valuation process isn’t an exact science and is rather intimidating.

Risk Premium 71

Risk Premium Business Valuation Equity 71

Equilest

APRIL 11, 2023

With limited features and formulas, it can be difficult to account for all the necessary parameters in a valuation, such as interest rates, equity risk premiums, and beta. It lacks interest rates, equity risk premiums, beta, and other important data.

Business Valuation 40

Business Valuation Beta Risk Premium Discounted Cash Flow 40

Musings on Markets

JANUARY 26, 2023

In its early years, Tesla was dependent on equity issuances for funding growth investments, and its liberal use of options to reward management (and especially Elon Musk) opened it up to criticism. The Market : The US equity market in January 2023 looks very different from the market at the start of 2022. per share in 2022.

Start-ups 99

Start-ups Marketability Risk Premium Equity 99

Musings on Markets

NOVEMBER 9, 2021

Risk : When I valued Tesla last in early 2020, I used a cost of capital of 7%, reflecting a risk free rate of 1.75% and an equity risk premium of 5.2% Rather than take issue with my valuation, put your inputs into the attached spreadsheet and estimate your value of equity for the firm. for mature markets.

Start-ups 101

Start-ups Dividends Marketability Market Capitalization 101

Musings on Markets

MAY 24, 2021

Looking at US equities, the S&P 500 is up about 11% and the NASDAQ about 5%, from start of the year levels, and the underperformance of the latter has led to a wave of stories about whether this is start of the long awaited comeback of value stocks, after a decade of lagging growth stocks.

Treasury 56

Treasury Start-ups Risk Premium Price to Book 56

Appraisal Rights

JUNE 5, 2017

In selecting the appropriate equity risk premium, the court observed that whether to use supply-side or historical ERP should be determined on a case-by-case basis.

Beta 40

Beta Risk Premium Capital Structure Discounted Cash Flow 40

Valutico

OCTOBER 20, 2022

Ce = Cost of Equity. Rf = Risk-free Rate. Rm – Rf) = Equity Market Risk Premium. Cp = Cost of Equity Premium. Ce = Cost of Equity. E = Equity . Depending on the exact methodology and discount rate used, this could be the Enterprise Value or Equity Value. Cost of Equity.

Discounted Cash Flow 52

Discounted Cash Flow Terminal Value Weighted Average Cost of Capital Net Present Value 52

Musings on Markets

FEBRUARY 2, 2023

Finally, my starting cost of capital of 10.15% reflects the reality that the riskfree rate and equity risk premiums have risen over 2022, and my ending number of 9% is an indication that I expect Tesla to become less risky over time. and 10.9%.

Start-ups 99

Start-ups Risk-free Rate Market Capitalization Marketability 99