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|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +39 011 6706060
Fax: +39 011 6706062
Web page: http://www.esomas.unito.it/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stefan Lutz, 2012.
"Risk premia in multi-national enterprises,"
The School of Economics Discussion Paper Series
1216, Economics, The University of Manchester.
- Lutz, Stefan, 2013. "Risk premia in multi-national enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 293-305.
- Stefan Lutz & Daniel Kleinfeldt, 2010.
"Risk as determinant of income and cross-border pricing of multi-national enterprises,"
ICER Working Papers
19-2010, ICER - International Centre for Economic Research.
- Stefan Lutz & Daniel Kleinfeldt, 2013. "Risk as Determinant of Income and Cross-border Pricing of Multinational Enterprises," Studies in Microeconomics, , vol. 1(2), pages 185-212, December.
- 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.
- André F. Perold, 2004. "The Capital Asset Pricing Model," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 3-24, Summer.
- Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
- Fama, Eugene F., 1977. "Risk-adjusted discount rates and capital budgeting under uncertainty," Journal of Financial Economics, Elsevier, vol. 5(1), pages 3-24, August.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- R. Cesari, 2003. "Option Pricing and Asset Valuation," Working Papers 467, Dipartimento Scienze Economiche, Universita' di Bologna.
When requesting a correction, please mention this item's handle: RePEc:icr:wpicer:15-2011. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simone Pellegrino)
If references are entirely missing, you can add them using this form.