Equity Risk Premiums

Every company valuation requires the calculation of a discount rate to discount at the present day future cash flows to arrive at the intrinsic value of a company. 

In company valuation the discount rate, or more precisely the weighted average cost of capital (WACC), is obtained by a weighted average of the cost of equity and the cost of debt. 

WACC = (Cost of Equity * Market Capitalization) + ( Cost of Debt * Market Value of Debt * 1-Tax Rate) 

Where the cost of equity formula is:

Cost of Equity = Risk-Free Rate + Equity Risk Premium * Beta 

The risk-free rate notably refers to the interest rate investors can reasonably expect to receive from assets with a chance of default close to zero like sovereign bonds such as the U.S. 10-Year Treasury, the U.K. 10-Year Gilt, or the Euro Area 10-Year Government Benchmark Bond. 

When investors decide to invest in non-risk-free assets, they require a greater return to compensate for the higher risks undertaken. 

In company valuation, the equity risk premium represents the expected greater return, however, not every company has the same degree of risk. The beta captures the degree of risk of a company, or of an industry, compared to the whole market. 

While this page provides a comprehensive list of betas for 37 different industries and instructions on their utilization, as regards the equity risk premium, you can find the equity risk premiums you need for 39 different countries right here!

More precisely, the following list presents the implied equity risk premiums calculated for 39 different MSCI country indexes, each representing 85% of the free float-adjusted market capitalization of their respective country. 

For more information about the calculation of implied equity risk premiums check out the website of Professor Aswath Damodaran where you will find precious information on equity risk premiums and many more insights on company valuation.

Last update: 04/10/2024