Corporate Finance Partner

Finiconsult Ltd. F-Valuation Software

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 2011.

Last Risk Premium 2011 now avalailable.
As a professional you know that discount rates, cash flow forecasts and continuing values are the main ingredients in company valuations. Professional valuations pay sufficient attention to these elements. Multiplying annual profits by an arbitrary number can anybody of course. For the discount rate or WACC, normally the CAPM (Capital Asset Pricing Model) and APM (Arbitrage Pricing Model) is used. These methods determine the remuneration for equity by a margin on top of the risk free rate on government bonds. This margin is determined by the historical equity premium above the risk free rate over a certain period of time. This requires a lot of information that is supplied by multiple vendors. These include such sources as supplied by for example Ibbotson, Duff & Phelps, or Damodaran.

All of these sources have advantages and disadvantages. The main disadvantage is that these models are static, fixed on a limited number of years and calculation methods. Yet every professional knows that the risk premium varies with the number of years and the method of calculation. Not any source disposes of all available years since 1900, all calculation methods and/or choices as to the number of years. All of these options are allowed to users of our F-Valuation Software. With all calculation methods and all data from 1900 to 2010 for the major Western European countries and the USA. You have to take ownership of your risk premium. As a professional you really cannot do without.
A free 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.

Average outcomes.
As mentioned, besides the selected method(s), also the choice of the number of years is important. Our preference goes to the greatest number of years with as method the unweighted average of all calculation methods. On that basis for example, the UK risk premium 2011 became 4.05% and the USA risk premium 4.98%. Without knowing all calculation details, these numbers have a relative value. In Germany for example, we recommend not to use the numbers since 1900 being 3.52% actually but the numbers since 1925 being 5.11%, due to defects in the 1900-1925 figures (high inflation).

Looking at the average American professors used for the USA, that was 6.0% in 2010 and 5.7% in 2011. According to American analysts these risk premiums were 5.1% in 2010 and 5.5% in 2011. See Pablo Fernandez, Javier Aguirreamalloa and Luis Corres. Given declining interest rates and rising prices on the stock exchanges after the worst of the credit crisis in 2008 however, declining numbers are unlikely. Other sources also show great diversity. Unity in the camp of 'fundamental valuators' is hard to find again in terms of risk premiums.

Best Regards,

Finiconsult Ltd
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