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What Is Risk-Free Rate?

Andrew Stolz

Definition of Risk-Free Rate. The risk-free rate is the minimum rate of return on an investment with theoretically no risk. It is also the rate that provides an investor with some return and some compensation for future inflation.

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Financing Year in Review: The Tide Turns

Harvard Corporate Governance

2022 brought a halt to a nearly unabated 12-year run of booming credit markets and “lower for longer” interest rates. Looking ahead to 2023, with risk-free rates and credit spreads still elevated and the credit, deal making, regulatory and geopolitical environments uncertain, corporate borrowers and sponsors will need to plan rigorously to succeed on levered acquisitions and spin-offs and important refinancings.

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What Is Equity Risk Premium?

Andrew Stolz

Definition of Equity Risk Premium. It is the difference between expected returns from the stock market and the expected returns from risk-free investments. What Impacts the Equity Risk Premium? How Do You Calculate Equity Risk Premium?

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Understanding Discount Rates – Parts 1 through 5

Exit Strategy

The Risk Free Rate – Part 1 of 5 One of the most important inputs surrounding the valuation of the business is the discount rate that is used in the analysis. The post Understanding Discount Rates – Parts 1 through 5 appeared first on Exit Strategies Group, Inc.

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What is the Capital Asset Pricing Model (CAPM)?

Andrew Stolz

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.

Beta 52
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Country Risk: A 2022 Mid-year Update!

Musings on Markets

It has been my practice for the last two decades to take a detailed look at how risk varies across countries, once at the start of the year and once mid-year. There are several services that attempt to estimate composite country risk scores, incorporating the multiple factors.

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What Is Cost of Equity?

Andrew Stolz

To compensate for the risks that shareholders take, firms pay them in return. In other words, the cost of equity is the rate of returns a firm pays to its shareholders. Risk-free rate . The systematic risk of the security (Beta).

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Data Update 3: Inflation and its Ripple Effects!

Musings on Markets

While the implied inflation in bond rates is low, investors seem to be anticipating higher inflation. Interest Rates and Inflation Inflation and interest rates are intertwined, and when their paths deviate, as they sometimes do, there is always a reckoning.

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Data Update 2 for 2022: US Stocks kept winning in 2021, but…

Musings on Markets

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).

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Twitter Inc.

Valutico

As you can see below, we calculated the discount rate using a levered beta of 0,72 and a risk free rate of 2.4%. Twitter Inc. Highlights: Market cap: USD 30.3 billion. Valutico Valuation: DCF USD 22,936 – 34.461 billion (WACC 8,7%). Elon Musk buys 9.2%

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Arbitrage Pricing Theory (APT) - Can it Enhance Valuation?

Equilest

Arbitrage Pricing Theory (APT) is a financial model that describes how the price of an asset is determined by a number of factors or "risk factors." The theory suggests that the expected return on an asset can be modeled as a linear function of various macroeconomic factors or "factor loadings" that affect the asset's risk, such as market risk, industry risk, and country risk. First, we need to estimate the factor loadings for each risk factor.

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Convertible Arbitrage Hedge Funds: The Perfect Combination of Investment Banking and Sales & Trading?

Brian DeChesare

Convertible bonds offer lower coupon rates than traditional bonds because they also include conversion options that allow investors to turn the bonds into common shares if the company’s stock price reaches a certain level (the “conversion price”). Credit Investing or Credit Rating Agency: 6%.

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Elon Musks Takeover: Valutico Valuation of Twitter Inc

Valutico

He announced his intention to make Twitter a “global platform for free speech” because it is important for civilisation. As you can see below, we calculated the discount rate using a levered beta of 1.2 and a risk-free rate of 3.0%.

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Adobe Inc.

Valutico

Adobe looks forward for continued decelerating growth rates in the next quarter, but expects growth to pick up in the second half of this year. As you can see below, we calculated the discount rate using a levered beta of 1.11 and a risk free rate of 2.8%.

Beta 52
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Data Update 4 for 2021: The Hurdle Rate Question!

Musings on Markets

What is a hurdle rate for a business? In this post, I will start by looking at the role that hurdle rates play in running a business, with the consequences of setting them too high or too low, and then look at the fundamentals that should cause hurdle rates to vary across companies.

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Data Update 2 for 2021: The Price of Risk!

Musings on Markets

The failures of the signal have been variously attributed to low interest rates, accounting mis-measurement of earnings (especially at tech companies), and by some, to animal spirits. Does the price of risk have to be positive? Data Update 2 for 2021: The Price of Risk!

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Use of Discounted Cash Flow Approaches in US GAAP Accounting

ThomsonReuters

A discounted cash flow approach involves projecting a stream of cash flows for an item and then applying a discount rate to those cash flows to calculate a single value or a range of values for that item. Developing Assumptions for Expected Cash Flows and the Discount Rate.

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Elon Musks Takeover: Valutico Valuation of Twitter Inc

Valutico

He announced his intention to make Twitter a “global platform for free speech” because it is important for civilisation. As you can see below, we calculated the discount rate using a levered beta of 1.2 and a risk-free rate of 3.0%.

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Data Update 3 for 2023: Inflation and Interest Rates

Musings on Markets

The US treasury market, considered by some still as a safe haven, was anything but safe or a haven, especially at the long maturities, as long term rates soared, with inflation (not the Fed) being the key driver. I will wager that you would have seen rates go up, with or without the Fed.

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Adobe Inc.

Valutico

Adobe looks forward for continued decelerating growth rates in the next quarter, but expects growth to pick up in the second half of this year. As you can see below, we calculated the discount rate using a levered beta of 1.11 and a risk free rate of 2.8%.

Beta 52
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Data Update 2 for 2023: A Rocky Year for Equities!

Musings on Markets

It is the nature of stocks that you have good years and bad ones, and much as we like to forget about the latter during market booms, they recur at regular intervals, if for no other reason than to remind us that risk is not an abstraction, and that stocks don't always win, even in the long term.

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Interest Rates, Earning Growth and Equity Value: Investment Implications

Musings on Markets

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. Coming in 2020, the ten-year T.Bond rate at 1.92% was already close to historic lows.

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Apple vs. Saudi Aramco – comparing the most valuable companies in the world

Valutico

Rising oil prices, while good for Aramco’s profits, are exacerbating rising inflation that is forcing the Federal Reserve to raise interest rates at the fastest pace in decades. Accordingly, we rate the tech company as slightly overvalued.

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The Walt Disney Company to return to full strength?

Valutico

and a risk-free rate of 3.3%. The Walt Disney Company. Weekly Valuation – Valutico | 27June 2022. Full valuation: click here. Summary: . – Disney’s near-term outlook is uncertain. – It may take years for Disney to return to full strength.

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The Walt Disney Company to return to full strength?

Valutico

and a risk-free rate of 3.3%. The Walt Disney Company. Weekly Valuation – Valutico | 27June 2022. Full valuation: click here. Summary: . – Disney’s near-term outlook is uncertain. – It may take years for Disney to return to full strength.

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Netflix Inc

Valutico

As you can see below in the valuation overview and WACC calculation, we calculated the discount rate using a levered beta of 1.08 and a risk-free rate of 3%. Netflix Inc. Weekly Valuation: Netflix Inc – Valutico | 20 April 2022. Summary.

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What is Beta in Finance, and why is it Essential for a Business Valuation?

Equilest

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 firm's risk assessment is done by calculating the weighted average capital price, which weighs the cost of debt (foreign capital) and the cost of equity. What is Beta in Finance, and why is it essential for a business valuation?

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How Much Can Gazprom Prosper From Europe’s Energy Crisis?

Andrew Stolz

Fundamentals, Valuation, Momentum, and Risk (FVMR). Free cash flow – Gazprom. Russia has a massively high risk-free rate of 10%. Key risk is fluctuations in oil price. Highlights: Bright future of natural gas as a transition fuel.

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Can Idemitsu Kosan Generate Enough Cash From Oil to Fund Transition?

Andrew Stolz

Fundamentals, Valuation, Momentum, and Risk (FVMR). Free cash flow – Idemitsu Kosan. Historically, Japan has a very low risk-free rate. Key risk is high dependency on oil. Highlights: Slowing oil consumption could result in declining revenue.

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Review the concept of WACC

Andrew Stolz

The cost of capital also reflects the riskiness of a firm which reflects the required rate of return. 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.

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Tesla in 2023: A Return to Reality, The Start of the End or Time to Buy?

Musings on Markets

As I noted in my last post , rising risk free rates and equity risk premiums have pushed up the costs of equity for all companies, and Tesla is not only no exception but is perhaps even more exposed as an above-average risk company.

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Data Update 1 for 2022: It is Moneyball Time!

Musings on Markets

The consensus can be wrong : A few months ago, I made the mistake of watching Moneyheist, a show on Netflix, based upon its high audience ratings on Rotten Tomatoes , and as I wasted hours on this abysmal show, I got a reminder that crowds can be wrong, and sometimes woefully so.

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Discounted-Cash-Flow-Analysis: Your Complete Guide with Examples

Valutico

The DCF method takes the value of the company to be equal to all future cash flows of that business, discounted to a present value by using an appropriate discount rate. r = interest rate (or discount rate). {n} r = discount rate. g is the terminal growth rate.

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Tesla's Trillion Dollar Moment: A Valuation Revisit!

Musings on Markets

The first is that the company stumbled briefly on revenues in the second quarter of 2020, as COVID restrictions kicked in, but saw a surge in growth in the quarters since, with growth rates significantly higher than in the pre-COVID years.

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A Zomato 2022 Update: Value, Pricing and the Gap

Musings on Markets

That opening day glow lasted for the rest of 2021, abetted by easy access to risk capital, and the stock maintained its lofty pricing. On July 21, 2021, I valued Zomato just ahead of its initial public offering at about ? 41 per share.

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Data Update 4 for 2022: Risk = Danger + Opportunity!

Musings on Markets

In the first few weeks of 2022, we have had repeated reminders from the market that risk never goes away for good, even in the most buoyant markets, and that when it returns, investors still seem to be surprised that it is there. What is risk? Hurdle Rates Risk

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In Search of a Steady State: Inflation, Interest Rates and Value

Musings on Markets

In fact, the average inflation rate in the 2011-20 decade was the lowest of the seven decades that I cover in this chart. While the market-implied expected inflation rate has also climbed to a ten-year high of 2.85%, it is clearly lower than the consumer survey expectation.

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Breaking Down the Delaware Supreme Court’s DFC Global Decision**

Appraisal Rights

The Court said that it could not uphold that ruling, given the lack of any evidence in the record suggesting that the markets themselves were incapable of pricing such regulatory risk. The Court thus found that DFC Global’s public shareholders, other buyers in the sales process and even participants in the market for DFC Global’s debt were capable of evaluating the regulatory risk that DFC Global faced, and there was no record evidence to the contrary.

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Top 5 Accounting Issues to Master to Avoid Snags in SPAC IPOs

ThomsonReuters

Attorneys caution the rush to go public via a SPAC vehicle, termed “De-SPACing,” comes with substantial risk. “It Additionally, private companies have options in a few areas—most notably use of IBR or risk-free rate–that public companies do not,” she said.

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Inflation and Investing: False Alarm or Fair Warning?

Musings on Markets

Along the way, it has been a bumpy ride, as the market wrestles with two competing forces, with an economy growing faster than expected, acting as a positive, and worries that this growth will bring with it higher inflation and interest rates, as a negative.

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Marking Time: A new year, a fresh semester and its class time!

Musings on Markets

Thus, you and I can disagree about whether beta is a good measure of risk, but not on the principle that no matter what definition of risk you ultimately choose, riskier investments need higher hurdles than safer investments.