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

Stefan Lutz

ICER Working Papers from ICER - International Centre for Economic Research

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.

Keywords: firm valuation; DCF; CAPM; risk premium; transfer pricing (search for similar items in EconPapers)
JEL-codes: G1 G3 M4 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2011-10
New Economics Papers: this item is included in nep-cis
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Simultaneous determination of market value and risk premium in the valuation of firms (2012)
Working Paper: Simultaneous determination of market value and risk premium in the valuation of firms (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:icr:wpicer:15-2011

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