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.

Latest Risk Premium 2015 now avalailable.
As the result of lower share prices combined with lower interest rates, the UK risk premium 2015 moved down to 1,91%. For 2014 the risk premium was 3,50%, in 2013: 1.67, in 2012: 1.56% 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 long term 'risk free' UK rate moved also down to 2,09% from 3,47% end 2013, end 2012:2.32% and end 2011: 2.45%. In total this gives actually a WACC about 4.00% (1,91+2,09)remuneration for the equity component in company and other valuations. This WACC figure gives also a clue if stock markets are over- or undervalued. Disregarding leverage possibilities, a WACC of around 4.00% implies conversely, a theoretical Price/Earnings relation of about 25. The actual unweighted PE of the FTSE 100 for example showed in August a value of 18,77 giving a large difference of 6,23. Bear in mind that the comparabale weighted PE is 24,29. This difference is more or less in line with most European markets as visible in this overview.

All this looks theoretically as a good entry point for UK shares. In this reasoning the stock market party might still go on for a while. Insert for example in this WACC some leverage. That will further increase the difference with observed PE. The almost continuous rise in stock prices in recent years, attracts "gamblers" in the market. Low interest rates make acquisitions more attractive. Some financial derivates (like turbos, speeders, boosters etc.) 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 3.31% 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 further up.

But a warning is in place. 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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