Andrew Stolz

AUGUST 5, 2020

It helps an investor understand what to expect to earn in relation to the risk-free rate and the market return. CAPM assumes that the minimum a rational investor would earn is the risk-free rate by buying the risk-free asset. How Do You Calculate the Capital Asset Pricing Model? E(r) = Rf + ??(Rm

Risk-free Rate 52

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

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 92

Risk Premium Beta Start-ups Equity 92

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

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. In fact, there are about a dozen countries that are unrated, where I have used their PRS scores to make estimates of their equity risk premiums.

Risk Premium 97

Risk Premium Start-ups Equity Marketability 97

Musings on Markets

JANUARY 27, 2022

Beyond the 10-year maturity, the slope of the yield curve actually flattened out, with the difference between the 30-year rate and the 10-year rate declining by 0.34%. Note that the decrease in default spreads, at least for the lower ratings, mirrors the drop in the implied equity risk premium during the course of 2021.

Risk-free Rate 99

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

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

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

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. The rise in rates transmitted to corporate bond market rates, with a concurrent rise in default spreads exacerbating the damage to investors.

Treasury 97

Treasury Start-ups Risk Premium Equity 97

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. Inflation rate: ß = 0.6, The risk-free rate is 5%.

Risk-free Rate 52

Risk-free Rate Risk Premium Beta Marketability 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? for Ford).

Risk-free Rate 52

Risk-free Rate Risk Premium Start-ups Equity 52

Musings on Markets

JANUARY 5, 2024

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

Dividends 106

Dividends Risk Premium Equity Book Value 106

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 capital also reflects the riskiness of a firm which reflects the required rate of return. WACC is also viewed as appropriate for a discount rate.

Beta 52

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

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 82

Equity Book Value Start-ups Corporate Finance 82

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

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

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.

Start-ups 101

Start-ups Dividends Marketability Market Capitalization 101

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

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

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 55

Treasury Start-ups Risk Premium Price to Book 55

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 . t = Tax Rate. Add these to get the free cash flow for that single year (or particular period, like 6 months).

Discounted Cash Flow 52

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

Musings on Markets

FEBRUARY 2, 2023

The first of the is as companies scale up, there will be a point where they will hit a growth wall, and their growth will converge on the growth rate for the economy. In short, I am assuming that the price cuts and cost pressures of the fourth quarter are more representative of what Tesla will face in the future, as competition steps up.

Start-ups 99

Start-ups Risk-free Rate Market Capitalization Marketability 99

Musings on Markets

JANUARY 12, 2021

Discount rates in intrinsic valaution have to change to reflect current market conditions, and can be expected to change over time. Discount rates in intrinsic valaution have to change to reflect current market conditions, and can be expected to change over time.

Corporate Finance 52

Corporate Finance Start-ups Finance Marketability 52

Musings on Markets

JANUARY 19, 2022

In a post at the start of 2021 , I argued that while stocks entered the year at elevated levels, especially on historic metrics (such as PE ratios), they were priced to deliver reasonable returns, relative to very low risk free rates (with the treasury bond rate at 0.93% at the start of 2021). The year that was.

Risk Premium 99

Risk Premium Risk-free Rate Start-ups Equity 99

Musings on Markets

JANUARY 28, 2024

In my last data updates for this year, I looked first at how equity markets rebounded in 2023 , driven by a stronger-than-expected economy and inflation coming down, and then at how interest rates mirrored this rebound.

Risk Premium 121

Risk Premium Beta Start-ups Equity 121

Musings on Markets

JULY 25, 2023

Just to illustrate the contradictions that can result, PRS gives Libya a country risk score that is higher (safer) than the scores it gives United States or France, putting them at odds with most other services that rank Libya among the riskiest countries in the world.

Risk Premium 52

Risk Premium Equity Start-ups Risk-free Rate 52

Musings on Markets

MARCH 25, 2021

The first quarter of 2021 has been, for the most part, a good time for equity markets, but there have been surprises. The first has been the steep rise in treasury rates in the last twelve weeks, as investors reassess expected economic growth over the rest of the year and worry about inflation. Riskfree rate will rise.

Equity 52

Equity Risk-free Rate Treasury Start-ups 52

Musings on Markets

JULY 27, 2022

grow at the cost of equity), yielding about ?46 The effects of inflation show up first as higher risk free rates , across currencies, and next in higher risk premiums, with both equity risk premiums and default spreads rising. higher (i.e., 46 in July 2022. 2% from my IPO valuation.

Risk Premium 98

Risk Premium Start-ups Equity Marketability 98

Musings on Markets

JANUARY 8, 2022

Risk Premiums : You cannot make informed financial decisions, without having measures of the price of risk in markets, and I report my estimates for these values for both debt and equity markets.

Risk Premium 99

Risk Premium Start-ups Market Capitalization Corporate Finance 99

Musings on Markets

JANUARY 17, 2025

In my last post , I noted that the US has extended its dominance of global equities in recent years, increasing its share of market capitalization from 42% in at the start of 2023 to 44% at the start of 2024 to 49% at the start of 2025.

Equity 129

Equity Risk Premium Treasury Start-ups 129

Musings on Markets

JANUARY 28, 2025

Using a different lexicon, the price of risk in the bond market decreased during the course of the year, and if you relate that back to my second data update, where I computed a price of risk for equity markets (the equity risk premium), you can see the parallels.

Banking 71

Banking Treasury Risk Premium Start-ups 71

Equidam

APRIL 22, 2025

It determines the price per share, dictating how much equity founders concede in exchange for the capital raised. [3] 3] , [7] , [6] It sets a benchmark against which future fundraising rounds will be measured and helps investors assess whether the potential upside justifies the significant risks associated with early-stage ventures. [8]

Discounted Cash Flow 64

Discounted Cash Flow Terminal Value Marketability EBITDA 64

Equidam

APRIL 22, 2025

2] Startups typically lack significant historical financial data, often operate with negative profits initially, rely heavily on private equity or venture capital rather than traditional bank loans, and face a much higher risk of failure. [1] This premium rises when perceived market risk increases. [27] 2] [15] [17].

Discounted Cash Flow 52

Discounted Cash Flow Marketability Risk Premium Start-ups 52

Musings on Markets

FEBRUARY 6, 2025

The results, broken down broadly by geography are in the table below: As you can see, the aggregate market cap globally was up 12.17%, but much of that was the result of a strong US equity market. I am no expert on exchange rates, but learning to deal with different currencies in valuation is a prerequisite to valuing companies.

Risk Premium 69

Risk Premium Start-ups Enterprise Value Equity 69