Corporate Finance Partner

Dear ...... ,

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 2016 already available now!
The risk premium 2016 at 6.52% remained almost stable in the USA compared to 2015 at 6,53%. 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.
The 'risk free' US rate went slightly down to 2.14% from 2,54% end 2014. In total this gives actually about 8.66% remuneration for the equity component in company and other valuations.

When gearing is left out of the assumptions, a WACC of also 8.66% is the result, or conversely, a theoretical Price/Earnings ratio of 11,54. In the USA the unweighted Dow Jones index on February 11, 2016 showed a PE ratio of 16,5 based on 2016 estimated net earnings. The weighted Dow Jones showed a PE of 18.27. These negative differences of -4.96(unweighted) or -6.73(weighted) between theoretical and actual PE has implications.

Implications!
- Assuming for example that stock can be safely valued with 35% equity and 65% loan, this geared WACC would become 3.67% and geared theoretical PE 27.2. Compared with the actual weighted PE of 18.27, would suggest there are some 8.93 points left for further price increase. But this appears to be the absolute maximum bearing in mind that the last credit crisis 2007 started with a difference of 9.2. Also the negative difference between safe returns on lending to the US government at 2.14% and less safe dividend returns at 2.08% does not stimulate investing in stock. All this implies that US stock prices might have (over) reached their peak already and are unlikely to rise further.
- Comparing on this PE-criteria overview USA stock markets to Europe, USA stock looks overvalued. The large differences can in no way be explained by the small actual differences in economic growth rates.
So, ignoring the possible effect of gamblers, (strategic) investors, pension and investment funds should at least change into European shares. It is not evident they did last year. Maybe they do not accept the underlying theory. Maybe they rely on the only excuse left: "animal spirits" continuing to drive the market further upwards.

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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