Simultaneous determination of market value and risk premium in the valuation of firms
AbstractValuing a firm using the discounted cash flow method (DCF) requires the joint determination of the market value of its equity (MVE) together with the equity risk premium (ERP) the firm should earn, since the latter is part of the discount rate used in the calculation of the MVE. This paper presents a theoretical derivation of how MVE and ERP can be calculated simultaneously under fairly general conditions. Besides firm data on free cash flow to equity the only external data needed are the risk-free rate of interest and a parameter indicating the required market risk premium per return volatility.
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Bibliographic InfoPaper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 15-2011.
Length: 15 pages
Date of creation: Oct 2011
Date of revision:
firm valuation; DCF; CAPM; risk premium; transfer pricing;
Other versions of this item:
- Stefan Lutz, 2012. "Simultaneous determination of market value and risk premium in the valuation of firms," Documentos de Trabajo del ICAE 2012-25, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Oct 2012.
- Stefan Lutz, 2011. "Simultaneous determination of market value and risk premium in the valuation of firms," The School of Economics Discussion Paper Series 1120, Economics, The University of Manchester.
- G1 - Financial Economics - - General Financial Markets
- G3 - Financial Economics - - Corporate Finance and Governance
- M4 - Business Administration and Business Economics; Marketing; Accounting - - Accounting
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The School of Economics Discussion Paper Series
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ICER Working Papers
08-2012, ICER - International Centre for Economic Research.
- Lutz, Stefan, 2013. "Risk premia in multi-national enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 293-305.
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