Simultaneous determination of market value and risk premium in the valuation of firms
Valuing 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.
|Date of creation:||Oct 2011|
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- Stefan Lutz & Daniel Kleinfeldt, 2010.
"Risk as determinant of income and crossborder pricing of multinational enterprises,"
The School of Economics Discussion Paper Series
1018, Economics, The University of Manchester.
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- Lutz, Stefan, 2013.
"Risk premia in multi-national enterprises,"
The North American Journal of Economics and Finance,
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- Stefan Lutz, 2012. "Risk premia in multi-national enterprises," ICER Working Papers 08-2012, ICER - International Centre for Economic Research.
- Stefan Lutz, 2012. "Risk premia in multi-national enterprises," The School of Economics Discussion Paper Series 1216, Economics, The University of Manchester.
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