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 Finance 40

Musings on Markets

JANUARY 28, 2024

Risk Differences across Countries In this final section, I will look risk differences across countries, both in terms of why risk varies across, as well as how these variations play out as equity risk premiums.

Risk Premium 93

Risk Premium Beta Start-ups Equity 93

Musings on Markets

JANUARY 24, 2024

Note also that during 2022 and 2023, the movements in these government bond rates mimic the US treasuries, rising strongly in 2022 and declining or staying stable in 2023.

Treasury 52

Treasury Risk Premium Start-ups Risk-free Rate 52

Musings on Markets

FEBRUARY 10, 2021

The answer, to me, seems to be obviously yes, though there are still some who argue otherwise, usually with the argument that country risk can be diversified away. In that post, I computed the equity risk premium for the S&P 500 at the start of 2021 to be 4.72%, using a forward-looking, dynamic measure. as mature markets.

Risk-free Rate 52

Risk-free Rate Risk Premium Start-ups Equity 52

Musings on Markets

OCTOBER 4, 2023

Price of Risk The drop in stock and bond prices in the third quarter of 2023 can partly be attributed to rising interest rates, but how much of that drop is due to the price of risk changing? below the index value of 4288, confirming my base case conclusion.

Marketability 104

Marketability Start-ups Risk Premium Treasury 104

Musings on Markets

AUGUST 15, 2023

In every introductory finance class, you begin with the notion of a risk-free investment, and the rate on that investment becomes the base on which you build, to get to expected returns on risky assets and investments. What is a risk free investment? Why does the risk-free rate matter?

Risk-free Rate 80

Risk-free Rate Treasury Risk Premium Start-ups 80

Valutico

DECEMBER 12, 2023

We’ve added a ‘date picker’ across key resources sections, allowing you to examine risk-free rates, corporate tax rates, market risk premium, and country ratings across any historic date you select. Resources Section Date Improvement: What? Why Important?

Risk-free Rate 52

Risk-free Rate Risk Premium Market Risk Marketability 52

Musings on Markets

FEBRUARY 11, 2023

In this section, I will begin measures of country default risk, including sovereign ratings and CDS spreads, before moving to more expansive measures of country risk before concluding with measures of equity risk premiums for countries, a pre-requisite for estimating the values of companies with operations in those countries.

Risk Premium 76

Risk Premium Start-ups Equity Marketability 76

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 84

Risk-free Rate Treasury Price to Book Start-ups 84

Musings on Markets

MAY 6, 2022

Note that in all three cases, it is not the Fed that is driving rates, but what is happening to inflation. As the inflation bogeyman returns, the worries of what may need to happen to the economy to bring inflation back under control have also mounted.

Risk Premium 92

Risk Premium Treasury Start-ups Equity 92

Musings on Markets

JANUARY 30, 2023

The rise in rates transmitted to corporate bond market rates, with a concurrent rise in default spreads exacerbating the damage to investors. That view has never made sense, because central banking power over rates is at the margin, and the key fundamental drivers of rates are expected inflation and real growth.

Treasury 74

Treasury Start-ups Risk Premium Equity 74

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. That is - if you do not know the beta, you cannot calculate the equity cost and, as a result, not the weighted average equity price.

Beta 40

Beta Business Valuation Finance Discounted Cash Flow 40

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. I extend my equity risk premium approach to cover other countries, using sovereign default spreads as my starting point, at this link.

Risk Premium 91

Risk Premium Start-ups Market Capitalization Corporate Finance 91

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. As a company with the bulk of its business in India, Zomato again is more exposed to these developments.

Risk Premium 81

Risk Premium Start-ups Equity Marketability 81

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 Start-ups 52

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.

Beta 52

Beta Capital Structure Risk-free Rate Weighted Average Cost of Capital 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. Estimation Approaches Why is it so difficult to estimate an equity risk premium?

Risk Premium 52

Risk Premium Risk-free Rate Equity Dividends 52

Musings on Markets

JANUARY 21, 2023

The premium that investors demand over and above the risk free rate is the equity risk premium , and practitioners in finance have wrestled with how best to estimate that number, since it is not easily observable (unlike the expected return on a bond which manifests as a current market interest rate).

Equity 70

Equity Risk Premium Start-ups Dividends 70

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 Start-ups Risk Premium Risk-free Rate 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. The risk premium may incorporate factors such as credit risk or market illiquidity.

Discounted Cash Flow 52

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

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 64

Dividends Terminal Value Enterprise Value Equity 64

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 67

Risk Premium Beta Start-ups Equity 67

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.

Start-ups 99

Start-ups Dividends Marketability Market Capitalization 99

Musings on Markets

JANUARY 5, 2024

Employee Count & Compensation I nvesting Principle Financing Principle Dividend Principle Hurdle Rate Project Returns Financing Mix Financing Type Cash Return Dividends/Buyback s 1. Beta & Risk 1. Equity Risk Premiums 2. Ratings & Spreads 2. Tax rates 4. Return on Equity 1. Debt Details 1.

Dividends 98

Dividends Risk Premium Equity Book Value 98

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

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 55

Treasury Start-ups Risk Premium Price to Book 55

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 79

Equity Book Value Start-ups Corporate Finance 79

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.

Start-ups 80

Start-ups Marketability Risk Premium Equity 80

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

Valutico

OCTOBER 20, 2022

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

Discounted Cash Flow 52

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

Musings on Markets

JULY 25, 2023

Equity Risk across Countries Default risk measures how much risk investors are exposed to, when investing in bonds issued by a government, but when you own a business, or the equity in that business, your risk exposure is not just magnified, but also broader.

Risk Premium 52

Risk Premium Equity Start-ups Risk-free Rate 52