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Risk Premiums: A Look at CSRP

BVR

Company-specific risk is not an ideal name for this risk. All firms face company-specific risks, many of which are somewhat similar across industries and companies. For example, how many firms have you valued that had to deal with the risk of customer concentration? company-specific riskIs anything “company-specific” per se?

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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 the Company-Specific Risk Premium: A Guide for Attorneys

Gross Mendelsohn

Understanding risk factors is essential in determining how a business will be valued. Let’s consider what your business-owning clients need to know about company-specific risks and how they come into play when it’s time for a business valuation.

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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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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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Reaping the Whirlwind: A September 2022 Inflation Update!

Musings on Markets

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.

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Risk Capital and Markets: A Temporary Retreat or Long Term Pull Back?

Musings on Markets

In this post, I will argue that almost everything that we are observing in markets, across asset classes, can be explained by a pull back on risk capital, and that understanding the magnitude of the pull back, and putting in historical perspective, is key to gauging what is coming next.

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Data Update 2 for 2021: The Price of Risk!

Musings on Markets

The Price of Risk The price of risk is what investors demand as a premium, an extra return over and above what they can make on a guaranteed investment (risk free), to invest in a risky asset. Does the price of risk have to be positive?

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Del. Supreme Court Hears SWS Oral Argument

Appraisal Rights

Part of the argument focused on the concept of size premium – a primer on which is available here – and which is being contested in the SWS appeal. Equity Risk Premium Fair Value Merger Price Size PremiumWe’ve written before about the SWS appraisal case, decided in mid 2017. After the ruling, petitioners appealed to the Delaware Supreme Court. On Wednesday, February 21, the Delaware Supreme Court held oral argument (which you can watch on this site ).

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SWS Group: The Breakdown

Appraisal Rights

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 Comparable Companies Discounted Cash Flow Analysis Equity Risk Premium Fair Value Interest on Appraised Value Merger Price Perpetuity Growth Rate Size Premium

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

Musings on Markets

As treasury rates have risen, markets also seem to have been more wary about risk, and how it is being priced. Inflation Price of Risk S&P 500The nature of markets is that they are never quite settled, as investors recalibrate expectations constantly and reset prices.

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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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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. Definition of Capital Asset Pricing Model.

Beta 52
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Data Update 1 for 2023: Setting the table!

Musings on Markets

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. High-Low Price Risk Measure 5. Equty Risk Premiums, by Country 4.

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Data Update 3 for 2023: Inflation and Interest Rates

Musings on Markets

Just as rising equity risk premiums push up the cost of equity, rising default spreads push up the cost of debt of companies, with the added complication of higher default risk for those companies that had pushed to the limits of their borrowing capacity in a low interest-rate environment.

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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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What Is Arbitrage Pricing Theory?

Andrew Stolz

It is a model based on the linear relationship between an asset’s expected risk and return. Both the theories explain the relationship between expected return and risk; although, the arbitrage pricing theory is harder to implement. The risk-free rate is 5%.

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Use of Discounted Cash Flow Approaches in US GAAP Accounting

ThomsonReuters

The Codification may require the use of a risk-free rate in some places and a risk-adjusted rate in others. For instance, a public company may be required to use a risk-adjusted rate, whereas a private company may be permitted to use a risk-free rate to reduce complexity.

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Data Update 1 for 2022: It is Moneyball Time!

Musings on Markets

In short, and at the risk of stating the obvious, having access to data is a benefit but it is not a panacea to every problem. I extend my equity risk premium approach to cover other countries, using sovereign default spreads as my starting point, at this link.

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Russia in Ukraine: Let Loose the Dogs of War!

Musings on Markets

Bond Markets and Default Risk In times of trouble, the first to panic are often lenders to the entities involved, and in today's markets, the extent of the reaction to country-level troubles can be captured in real time in the sovereign CDS (Credit Default Swap) markets. Country Risk Crisis

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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 4 for 2021: The Hurdle Rate Question!

Musings on Markets

In making these allocation or investment decisions, businesses have to make judgments on the minimum return that they would accept on an investment, given its risk, and that minimum return is referenced as the hurdle rate. Data Update 2 for 2021: The Price of Risk!

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DEBRA, next big tax reform in Europe?

Simply Treasury

The definition of "net equity" is as follows: equity of the company = sum of subscribed capital, share premiums, revaluation reserves, reserves and retained earnings, minus the tax value of the company's holdings in associated companies and the tax value of its own shares.

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Data Update 1 for 2021: A (Data) Look Back at a Most Forgettable Year (2020)!

Musings on Markets

By focusing so much attention on a small subset of companies, you risk developing tunnel vision, especially when doing peer group comparisons. It is true that the Turkish company will face more risk because of its location, but that is an issue separate from currency.

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

Valutico

Market risk premium and risk free rate are both somewhat lower for the American firm than for the Arab oil company. Apple vs. Saudi Aramco – the most valuable companies in the world. Weekly Valuation – Valutico | 7 July 2022. Valuation Apple: click here.

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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?

Beta 40
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Data Update 3: Inflation and its Ripple Effects!

Musings on Markets

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.

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Tesla's Trillion Dollar Moment: A Valuation Revisit!

Musings on Markets

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%

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ESG's Russia Test: Trial by Fire or Crash and Burn?

Musings on Markets

Since one of ESG's sales pitches has been that following it’s precepts would insulate companies and investors from the risks emanating from bad corporate behavior, both ESG advocates and critics have looked to its performance in this crisis, to get a measure of its worth.

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Inflation and Investing: False Alarm or Fair Warning?

Musings on Markets

As inflation comes in above expectation, corporate borrowing rates will go up, and those higher interest rates can increase the risk of default across all corporate borrowers. Consequently, as inflation increases, equity risk premiums will tend to increase.

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Investor Taxes and Stock Prices: Threading the Needle!

Musings on Markets

With stocks, I compute this pre-personal tax return at the start of every month, using the current level of index and expected cash flows to back out an internal rate of return; this is the basis for the implied equity risk premium.

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Private company valuation: Better understand your worth

ThomsonReuters

Simply put, the higher the discount rate, the greater the risk associated with achieving your value projections, which amounts to a decreased valuation. Uncategorized Accounting Auditing Coronavirus COVID-19 Risk Management US Securities and Exchange Commission

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Review the concept of WACC

Andrew Stolz

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. The formula implies the return an investor expects from a risk-free investment plus the return from the stock in relation to market volatility.

Beta 52
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Interest Rates, Earning Growth and Equity Value: Investment Implications

Musings on Markets

Every time a Federal Reserve chair or any of the FOMC members make utterances that undercut that credibility, the Fed risks losing even the limited signaling power it continues to have. Risk premiums No effect or even a decrease.

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

Valutico

Let’s say the discount rate, using the WACC, is 12% (so, this is a risky business – the higher the WACC, the riskier the business as investors expect to be compensated for taking on additional risk). Rf = Risk-free Rate. Rm – Rf) = Equity Market Risk Premium.

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Methods of Business Valuation by Their Profitability

Equilest

This result over several years is then valued by discounting, at a discount rate, symboled by i, taking into account the risk that this performance will not be achieved. We note that the higher the expected rate (in other words, the greater the risk is perceived as necessary, to the point of requiring a substantial "risk premium"), the lower the multiple that will apply and therefore the lower valuation: we buy cheaper which is less safe.

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The Zomato IPO: A Bet on Big Markets and Platforms!

Musings on Markets

Risk Profile : If you did not believe my assertions about the pointlessness of risk sections in IPOs, please do read all 30 pages of Zomato's risk profile (pages 39-68 of the prospectus). A Big Market Premium?

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Data Update 3 for 2021: Currencies, Commodities, Collectibles and Cryptos

Musings on Markets

In my last post , I described the wild ride that the price of risk took in 2020, with equity risk premiums and default spreads initially sky rocketing, as the virus led to global economic shutdowns, and then just as abruptly dropping back to pre-crisis levels over the course of the year.

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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.