Musings on Markets

JANUARY 27, 2022

Not only has the intrinsic risk free rate moved in sync with the ten-year bond rate for most of the last seven decades, but you can also see that the main reason why rates have been low for the last decade is not the Fed, with all of its quantitative easing machinations, but a combination of low growth and low inflation.

Treasury 93

Treasury Risk-free Rate Equity Price to Book 93

Andrew Stolz

AUGUST 5, 2020

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). The growth rate of dividends . Where R(e) = expected return on investment, Rf = risk-free rate, Rm = expected return of the market, and ??

Equity 52

Equity Dividends Risk-free Rate Systematic Risk 52

Andrew Stolz

AUGUST 6, 2020

The expected return on an asset is determined by the risk-free rate of return with the addition of the asset’s beta to each macroeconomic factor that impacts the return on the asset multiplied by the risk premium of those factors. Inflation rate: ß = 0.6, The risk-free rate is 5%. 1 + RP1 + ??2+

Risk-free Rate 52

Risk-free Rate Risk Premium Beta Marketability 52

ThomsonReuters

MAY 6, 2021

The Codification often provides guidance on how to select a discount rate for a particular area of accounting. The Codification may require the use of a risk-free rate in some places and a risk-adjusted rate in others. Recent events have also impacted the components of the discount rate.

Discounted Cash Flow 52

Discounted Cash Flow Risk Premium Risk-free Rate Intangible Assets 52

Equilest

JANUARY 3, 2023

Next, we need to estimate the risk-free rate and the risk premium for each risk factor. Let's say the risk-free rate is 3%, the risk premium for market risk is 5%, the risk premium for industry risk is 4%, and the risk premium for country risk is 2%.

Risk Premium 40

Risk Premium Risk-free Rate Market Risk Business Valuation 40

Valutico

APRIL 17, 2023

The WACC formula derives the current cost of each form of finance, starting with the risk-free rate, the expected return on equity, and the costs associated with debt financing. The required rate of return for equity (Re) is generally calculated using the Capital Asset Pricing Model (CAPM).

Weighted Average Cost of Capital 52

Weighted Average Cost of Capital Discounted Cash Flow Beta Equity 52

Valutico

APRIL 17, 2023

The WACC formula derives the current cost of each form of finance, starting with the risk-free rate, the expected return on equity, and the costs associated with debt financing. The required rate of return for equity (Re) is generally calculated using the Capital Asset Pricing Model (CAPM).

Weighted Average Cost of Capital 52

Weighted Average Cost of Capital Discounted Cash Flow Beta Equity 52

Musings on Markets

JANUARY 20, 2021

If, on the other hand, investors are risk neutral, the price of risk will be zero, and investors will buy risky business, stocks and other investments, and settle for the risk free rate as the expected return. It is only fair that I go first.

Risk Premium 52

Risk Premium Risk-free Rate Equity Dividends 52

Valutico

APRIL 12, 2023

The WACC formula derives the current cost of each form of finance, starting with the risk-free rate, the expected return on equity, and the costs associated with debt financing. The required rate of return for equity (Re) is generally calculated using the Capital Asset Pricing Model (CAPM).

Weighted Average Cost of Capital 52

Weighted Average Cost of Capital Discounted Cash Flow Beta Equity 52

Brian DeChesare

AUGUST 31, 2022

The risk-free rate is higher – because investors benefit from “delaying” their eventual purchase of the underlying shares when they earn higher interest elsewhere. The risk-free rate and time to maturity also affect the Liability component (and other factors, such as the company’s credit quality, play a role).

Banking 60

Banking Risk-free Rate Equity Start-ups 60

Musings on Markets

FEBRUARY 10, 2021

Going back to the start of this section, a company (say Ford) would require a higher cost of equity for a Nigerian project than for an equivalent German project (using a US $ risk free rate of 1% and a beta of 1.1 Cost of equity in US $ for German project = 1% + 1.1

Risk Premium 52

Risk Premium Risk-free Rate Equity Beta 52

Musings on Markets

MARCH 25, 2021

for the year are at war with its concurrent promise to keep rates low; after all, adding those numbers up yields a intrinsic risk free rate of 8.7%. The Stocks Story As treasury rates have risen in 2021, equity markets have been surprisingly resilient, with stocks up during the first three months.

Equity 52

Equity Risk-free Rate Treasury Price to Book 52

Equilest

JULY 31, 2022

According to the CAPM model - the return required by the shareholders can be described using the following equation: Cost of Equity = Risk-Free Rate + Beta x Risk Premium. It is customary to calculate the weighted average capital price using a financial model formula known as the CAPM (Capital Asset Pricing Model). .

Business Valuation 40

Business Valuation Beta Finance Discounted Cash Flow 40

Musings on Markets

JANUARY 21, 2023

That said, when investors buy equities, it would be both irrational and illogical to settle for expected returns that are less than what you can earn on risk free or guaranteed investments, though behavioral finance suggests that both irrationality and illogic are persistent human traits. Stocks: The What Next?

Equity 86

Equity Risk Premium Dividends Treasury 86

Musings on Markets

JANUARY 30, 2023

Returns in 2022 In my first classes in finance, as a student, I was taught that the US treasury rate was a risk free rate, with the logic being that since the US treasury could always print money, it would not default.

Treasury 83

Treasury Equity Risk Premium Risk-free Rate 83

Andrew Stolz

MARCH 20, 2020

The formula implies the return an investor expects from a risk-free investment plus the return from the stock in relation to market volatility. The market risk premium is calculated from a market rate of return less a risk-free rate. Suitability and limitation.

Capital Structure 52

Capital Structure Weighted Average Cost of Capital Dividends Equity 52

Andrew Stolz

JANUARY 28, 2022

Historically, Japan has a very low risk-free rate. However, my long-term outlook is a bit more optimistic. Idemitsu should be able to focus on its other segments to diversify away from oil. World Class Benchmarking Scorecard – Idemitsu Kosan. Identifies a company’s competitive position relative to global peers.

Dividends 52

Dividends Net Debt Risk-free Rate Equity 52

Andrew Stolz

JANUARY 28, 2022

Russia has a massively high risk-free rate of 10%. FCFF likely to remain volatile given abrupt changes in working capital. Value estimate – Gazprom. My revenue and margin forecast is roughly in line with analyst’s consensus. World Class Benchmarking Scorecard – Gazprom.

Net Debt 52

Net Debt Risk-free Rate Equity Marketability 52

Musings on Markets

FEBRUARY 8, 2022

In my last two posts, I noted that the prices of risk have drifted down in markets, with both equity risk premiums and default spreads decreasing through 2021.

Risk Premium 81

Risk Premium Beta Equity Risk-free Rate 81

Brian DeChesare

MAY 3, 2023

Dividend Discount Model, Part 4: Present Value of Terminal Value and Dividends Since the Dividend Discount Model is based on Equity Value, not Enterprise Value, the Discount Rate is the Cost of Equity: Risk-Free Rate + Equity Risk Premium * Levered Beta.

Dividends 59

Dividends Terminal Value Equity Capital Structure 59

Musings on Markets

JANUARY 8, 2022

Risk free Rates : While the US treasury bond rate is widely reported, I contrast its actual value with what I call an intrinsic measure of the rate, computed by adding the inflation rate to real growth each year at this link.

Risk Premium 100

Risk Premium Market Capitalization Corporate Finance Equity 100

Appraisal Rights

AUGUST 8, 2017

The Court concluded its opinion by walking through its several reasons for finding that the trial record in this case did not support the 29% increase in the perpetuity growth rate that the chancery court had made upon reargument. The Supreme Court Rejected the Cross-Appeal and Refused to Disregard the Comparable Companies Analysis.

Discounted Cash Flow 40

Discounted Cash Flow Comparable Company Analysis Risk-free Rate Appraisal 40

ThomsonReuters

JUNE 15, 2021

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.

Equity 64

Equity Risk-free Rate Book Value Start-ups 64

Musings on Markets

FEBRUARY 15, 2023

the returns you can make on investments of equivalent risk, and that game became a lot more difficult to win in 2022. Conclusion If 2022 was a reminder to investors that the end game for every business is to not just generate profits, but to generate enough profits to cover its opportunity costs, i.e,

Equity 52

Equity EBITDA Risk Premium Risk-free Rate 52

Valutico

OCTOBER 20, 2022

Rf = Risk-free Rate. Rm – Rf) = Equity Market Risk Premium. Now, we need to calculate the discount rate. . Risk free rate (can use 10y Treasury). Ce = Cost of Equity. B = Beta. (Rm Cp = Cost of Equity Premium. We will use the CoE and WACC formulas described above. . Cost of Debt.

Discounted Cash Flow 52

Discounted Cash Flow Terminal Value EBITDA Equity 52

Musings on Markets

JULY 27, 2022

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.

Risk Premium 87

Risk Premium Equity EBITDA Start-ups 87

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.

Market Capitalization 112

Market Capitalization Risk-free Rate Risk Premium Terminal Value 112

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% for mature markets.

Dividends 122

Dividends Equity Market Capitalization Marketability 122

Musings on Markets

MAY 6, 2022

In the equity market, I capture the price of risk with a forward-looking estimate of expected returns on stocks, computed from the level of stock prices and expected future cash flows, and I graph both the expected return and the implied equity risk premium (from netting out the risk free rate) in the graph below: Implied ERP spreadsheet In equity (..)

Risk Premium 121

Risk Premium Treasury Equity Start-ups 121

Musings on Markets

FEBRUARY 11, 2023

The conventional practice, when estimating risk free rates, has been to use the government bond rate in the local currency, if available, as the riskfree rate in that currency, and that practice is wrong when markets perceive default risk in the sovereign and build that into the government bond rate.

Risk Premium 74

Risk Premium Equity Start-ups Marketability 74

Musings on Markets

JANUARY 26, 2023

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.

Risk Premium 91

Risk Premium Equity Start-ups Marketability 91

Musings on Markets

MAY 24, 2021

Interest Rates : The most direct link between inflation and equity value is through the risk free rate (interest rate) that forms the base for the expected returns that investors demand for investing in a company's equity, and for lending it money.

Treasury 84

Treasury Risk Premium Equity Price to Book 84

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. Investors need to reassess their expected returns to reflect risk free rates & current ERP & default spreads.

Corporate Finance 52

Corporate Finance Finance Start-ups Marketability 52