Simultaneous Determination of Market Value and Risk Premium in the Valuation of Firms

Lutz, Stefan

doi:10.2139/ssrn.1942845

Abstract

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Simultaneous Determination of Market Value and Risk Premium in the Valuation of Firms

Stefan Lutz

University of Manchester - School of Economic Studies

October 12, 2011

ICER Working Paper No. 15/2011

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.

Number of Pages in PDF File: 15

Keywords: firm valuation, DCF, CAPM, risk premium, transfer pricing

JEL Classification: G1, G3, M4

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Date posted: October 17, 2011

Suggested Citation

Lutz, Stefan, Simultaneous Determination of Market Value and Risk Premium in the Valuation of Firms (October 12, 2011). ICER Working Paper No. 15/2011. Available at SSRN: http://ssrn.com/abstract=1942845 or http://dx.doi.org/10.2139/ssrn.1942845

Contact Information

Stefan Lutz (Contact Author)

University of Manchester - School of Economic Studies ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

HOME PAGE: http://www.manchester.ac.uk/research/stefan.lutz/