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Simultaneous determination of market value and risk premium in the valuation of firms

Lutz, Stefan (2012) Simultaneous determination of market value and risk premium in the valuation of firms. [ Documentos de Trabajo del Instituto Complutense de Análisis Econónomico (ICAE); nº 25, 2012, ] (Unpublished)

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Abstract

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.


Item Type:Working Paper or Technical Report
Additional Information:

JEL classification: G1, G3, M4

Uncontrolled Keywords:Firm valuation, DCF, CAPM, Risk premium, Transfer pricing.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Econónomico (ICAE)
Volume:2012
Number:25
ID Code:17038
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Deposited On:06 Nov 2012 13:02
Last Modified:15 Nov 2013 10:50

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