Corporate Finance Partner

Dear Madam/Sir .......,

You receive this message because you are interested in company valuation. You bought F-Valuation Software or downloaded a demo version in the past. Herewith the latest news on the risk premium.

Latest Risk Premium 2015 now finally available.
The continuing upswing in USA stock markets, resulted for 2015 in a risk premium of 6,53% in the USA. In 2014 this risk premium was 6,67%, in 2013: 3,80%, in 2012: 4,68% and 4.98% end 2011. All calculations are based on the maximum number of years since 1900 and using as method the unweighted average of all methods of calculation. Risk premiums in Europe in various contries may be found at this website under news etc. They tend to be much lower.

The 'risk free' US rate went slightly up to 2,54% from 2,35% end 2013, 1,80% end 2012, being 2.78% at the end of 2011 and 3.26% end 2010. In total this gives actually about 9.07% remuneration for the equity component in company and other valuations.

When gearing is left out of the assumptions, a WACC of also 9.07% is the result, or conversely, a theoretical Price/Earnings ratio of 11,03. In the USA the unweighted Dow Jones index August 2015 showed a PE ratio of 16,04 based on 2015 estimated net earnings. This negative difference of -5.01 between theoretical and actual PE means that USA stock is overvalued compared to European markets. This generally accepted conclusion is demonstrated in this overview. Bear in mind that the actual weighted PE ratio is much higher reaching almost 24.

Last year, under similar assumptions, similar facts leaded to the conclusion that (strategic) investors, pension and investment funds should sell US shares, at least change into European shares. They did not listen. Maybe they do not accept the underlying theory. Maybe they rely on the only excuse left: "animal spirits" continuing to drive the market upwards. There are many such "animal spirits". Just to name a few, some people insert in this WACC calculation substantial leverage. That will of course substantially decrease the difference with observed PE. The almost continuous rise in stock prices in recent years, continues attracting "gamblers" in the market. Low interest rates make acquisitions more attractive. Some financial derivates with exotic commercial names count with almost 100% leverage. This makes investment in shares rather popular with low interest rates and almost constant price increases. The current dividend yield of 2.1% make even conservative forms of investment interesting when financed with very low interest rates. In addition, other investments such as bonds, deposits, real estate, etc. appear at present not so attractive from the viewpoint of yield or risk. Which also warms the stock market party and 'animal spirits' further up. But the current WACC is strongly influenced by the interest policy of central banks. This can change from one day to the next if central banks attempt or are forced to pull out their of their QE dilemmas. But the WACC theory is based on a long term real economy with real leverage and neglects artificial factors and "gamblers". The artificial QE factor combined with a growing number of "gamblers" could easily cause a turning point on stock markets, implying higher risks than usual.

A free valuation demo can be downloaded from this website by clicking on the link: Free Software. The latest version 8 with the latest risk premiums can be purchased online with the link: Order Software.

Best Regards,

Finiconsult Ltd
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