Estimating the Cost of Equity and Equity Risk-Premia of Canadian Firms


Book Description

This article proposes an alternative approach to estimating the required rate of return on equity, combining the bond-plus risk-premium approach and the Capital Asset Pricing Model, and tests it using Canadian data. Individual stock risk-premia are classified into groups according to the point in the business cycle, risk based on each company's bond rating, and industry groups as defined by industry classification. Group averages are calculated. We find equity risk-premia are negatively related to interest rates and bond ratings. Moreover, the higher the risk of an industry group, the higher are the equity risk-premia. However, findings regarding the risk-premia's sensitivity to the business cycle and stability across business cycles are not very conclusive.




The Estimation of Equity Risk Premium for Canada


Book Description

In this paper I assess the equity risk premium for Canada. In order to accomplish the task, I use three different procedures. The first procedure extends the seminal Mehra and Prescott (1985) article and examines whether the equity risk premium puzzle exists for Canada during the last fifty years. This approach incorporates the conventional parameters of risk aversion and the time discount factor generally accepted by the existing literature. Moreover, the estimates of those parameters are derived which correspond to the observed premium provided by Canadian equities over risk free debt. The second procedure is based on Fama and French (2002). Different estimates of the risk premium are calculated using two growth models based on the growth rate of aggregate dividends and the growth rate of operating earnings. The third, and final, is the decomposition model based on the methodology employed by Dimson, Marsh and Staunton (2006). The main results argue for the existence of an equity premium puzzle for Canada, as the estimated parameter of risk aversion of the average investor is unrealistically high. Additionally, the estimates of the expected risk premium in real values using the growth and decomposition models argue for a smaller magnitude the historical risk premium.




2017 Valuation Handbook


Book Description

EVERYTHING YOU NEED FOR ACCURATE INTERNATIONAL COST OF CAPITAL ESTIMATIONS—IN A SINGLE VOLUME The 2017 Valuation Handbook – International Guide to Cost of Capital is part of the U.S. and international series of valuation resources authored by Duff & Phelps and published by John Wiley & Sons. This annually updated reference provides business valuation and finance professionals with the critical data they need to assess risk and develop cost of capital estimates on a global scale. Gauging the risks of an international investment is one of the trickiest aspects of finance. This comprehensive guidebook provides you with usable international data and methodology, and the ability to: Turn to a definitive resource of world-class data and guidance to gain a distinct competitive advantage in real-world situations. Access costly and difficult-to-obtain international data, assembled into easy-to-use cost of capital inputs at an accessible price point. Quickly grasp how concepts and methodologies translate into actual practice when they are brought to life in exemplifying cases. Accurate. Reliable. Trusted. The 2017 Valuation Handbook – International Guide to Cost of Capital gives you the upper hand the moment you open it. Other volumes in the annual series include: 2017 Valuation Handbook – International Industry Cost of Capital 2017 Valuation Handbook – U.S. Guide to Cost of Capital 2017 Valuation Handbook – U.S. Industry Cost of Capital




New Estimates of the Equity Risk Premium and Why Business Economists Need Them


Book Description

The equity risk premium (ERP) is used to estimate a firm's cost of equity and overall cost of capital. It therefore is relevant to, for example, capital budgeting analyses and calculation of economic value added. Unfortunately, current estimates of the ERP range widely. Some claim it has fallen to as low as around 2%, while others place it at 3 to 4 times this amount. Using a model that extracts the required return on equity from a valuation model based on dividends and repurchases of shares the ERP is estimated. This approach leads to estimates of the ERP of 3% to 6%.




Estimating the cost of equity


Book Description

This 9-hour free course looked at how to estimate the cost of equity using the dividend valuation model and the capital asset pricing model.




The Equity Risk Premium


Book Description

What is the return to investing in the stock market? Can we predict future stock market returns? How have equities performed over the last two centuries? The authors in this volume are among the leading researchers in the study of these questions. This book draws upon their research on the stock market over the past two dozen years. It contains their major research articles on the equity risk premium and new contributions on measuring, forecasting, and timing stock market returns, together with new interpretive essays that explore critical issues and new research on the topic of stock market investing. This book is aimed at all readers interested in understanding the empirical basis for the equity risk premium. Through the analysis and interpretation of two scholars whose research contributions have been key factors in the modern debate over stock market perfomance, this volume engages the reader in many of the key issues of importance to investors. How large is the premium? Is history a reliable guide to predict future equity returns? Does the equity and cash flows of the market? Are global equity markets different from those in the United States? Do emerging markets offer higher or lower equity risk premia? The authors use the historical performance of the world's stock markets to address these issues.







The Equity Risk Premium: A Contextual Literature Review


Book Description

Research into the equity risk premium, often considered the most important number in finance, falls into three broad groupings. First, researchers have measured the margin by which equity total returns have exceeded fixed-income or cash returns over long historical periods and have projected this measure of the equity risk premium into the future. Second, the dividend discount model—or a variant of it, such as an earnings discount model—is used to estimate the future return on an equity index, and the fixed-income or cash yield is then subtracted to arrive at an equity risk premium expectation or forecast. Third, academics have used macroeconomic techniques to estimate what premium investors might rationally require for taking the risk of equities. Current thinking emphasizes the second, or dividend discount, approach and projects an equity risk premium centered on 3½% to 4%.




Estimating the Equity Risk Premium with Time-Series Forecasts of Earnings


Book Description

The size of the equity risk premium remains an unanswered question in the accounting and finance literature. This study proposes a new approach to reverse-engineer the equity risk premium, distinct from prior research, in that it does not rely on analysts' forecasts to proxy for the market's earnings expectations. That I instead use time-series earnings forecasts allows an investigation of the equity risk premium across a broader cross-section of firms, including smaller firms that are not covered by analysts. This study finds that risk premia are significantly higher for firms not followed by analysts. This suggests that studies requiring analysts' earnings forecasts to estimate the equity risk premium have likely underestimated its overall level. Additional validity tests on my firm- and year-specific risk premium estimates reveal that these estimates consistently and predictably relate to multiple measures of risk, particularly for firms not followed by analysts.