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 2017 now avalailable.
The UK risk premium 2016 raised a bit to 2,45% compared to 2016 with 1.97%. For 2015 the risk premium was 1.91, in 2014: 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.
Central banks continue trying to control inflation by means of interest rates. So for the moment the UK risk-free interest rate remains very low, seen historically. The risk-free interest rate even moved downwards end 2016 to 1,56% from 2.29% end 2015. This means that, together with the 2,45% risk premium, the equity component in company valuation requires about 4.01% (2,45 + 1.56) reward currently. Thanks to low interest rates, financial leverage reduces risk premiums. When leverage is still excluded, all this translates into a WACC of 4.01%, or, conversely, a theoretical PE of 24,94. This theoretical PE is currently lower than the actual PE in the UK. For example, on 28-06-2017, the unweighted actual PE for example of the FTSE All Share showed a value of 47,8 and the FTSE100 31,7, much higher than last year.
History shows that turning points on the stock market only start if the real PE becomes much higher than the theoretical PE. The last turning point in the UK was November 10 2007 when the highest closing price of the FTSE100 was 6,724.54. At March 3 2009 already, the lowest position was reached at 3,512.09 and after that an almost continuous rise of the stock market started. Just before the 2007 crisis, the UK risk premium was 2,94%, the risk-free interest rate 4,54% resulting in a unleveraged WACC of 7,48%. See this overview . This level invited investors to pay in 2007 a real FTSE30 PE of 14,07. This level exceeded the theoretical 2007 PE of 13,37 (100 / 7,48) with more than 10%. The risk premium, currently around 2,45%, the risk-free interest rate ( 1,56%) and the WACC (4.01%), suggests a theoretical PE of 24.9 in 2017. Keeping in mind the 2007 lesson that a stock crisis is imminent when real PE exceeds theoretical PE,the questions arises what buffers are left. The buffer of strong leverage certainly helps, thanks to actually much lower interest rates compared to 2007. Strong leverage increases substantally the theoretical PE. The buffer of dividend yield (2.94% unweighted) also helps a bit as long as dividend yields remain higher than the risk free rate of 1,56% as indicator of likely financing costs. In 2007, the reverse situation existed with dividend yield of 3,27% and the risk free interest rate 4,51%.
But the question arises if these two buffers remain solid enough to withstand some panic.
It is good tradition in this bulletin to leave now the field of facts and figures to enter the world of gurus and prophets. The usual market irrationality, as reported on the 2006/2007 basis, suggests that the remaining buffers are already fragile. Two factors will increase fragility of the existing buffers or blow them away, turning them into panic factors. On the one hand irrationality, short term players and gamblers tend to drive stock prices further upwards. Financing costs tend to rise in future despite the fear of central banks to cause panic by raising interest rates. Thus, without warranty and subject to calamities, the actual tale of Goldilocks cannot continue forever.
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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