Dear Mr./Madam ....,
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.
Last Risk Premium 2014 now avalailable.
After the credit crisis in this year 2014, the UK risk premium moved up again to 3,50%. For 2013 the risk premium was 1.67%, 1.56% for 2012 and still 4.05% in 2011.
All calculations are based on the maximum number of years since 1900 and used as method the unweighted average of all methods of calculation.
The 'risk free' UK rate moved also up to 3,47% from 2.32% end 2012 and 2.45% end 2011.
In total this gives actually a WACC about 6.97% (3,50+3.47) remuneration for the equity component in company and other valuations.
This WACC figure also gives a clue if stock markets are over- or undervalued. Disregarding leverage possibilities, a WACC of around 6.97% implies conversely, a theoretical Price/Earnings relation of about 14, a substantial decrease from the earlier 25 in the past year.
The actual average PE on most European markets is more or less in line or slightly higher than the theoretical PE. In England for example, FTSE calculated actual PE of the UK All-Share index end 2013 at 14.89. Almost stable, being 12.32 end 2012, 10.60 end 2011 and 12,9 end 2010.
In 2006, the price-earnings ratio of the FTSE-30 was also approximately 14. The later facts made visible a clear overvaluation. At that time a similar WACC was calculated as 7,48% with a theoretical PE of 13,37 in 2006. This pointed at that time already to a slight overvaluation of about 0,64 point difference.
At present, the actual price-earnings ratio from the All-Share index at october 22, 2014 with 14 is almost identical with the 14 in 2006 and the actual theoretical PE at 14. However, banks and other lenders gradually overcome their problems of the credit crunch. Therefore, as long as interest rates remain low, there are more and cheaper sources of financing available. For these reasons, the current risk premium of 3,50% does not yet justify the right time to sell stocks. Of course, disasters (political or otherwise) reserved.
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