Corporate Finance Spring 2025 - Session 7: Equity Risk Premiums and Betas

This class was spent talking mostly about equity risk premiums. The key theme to take away is that equity risk premiums don't come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium. It is with this objective in mind that we computed an implied equity risk premium for the S&P 500, using the level of the index. If you want to try your hand at it, here is my February 2025 update: http://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb25.xlsx Play with the spreadsheet. In fact, try it with today’s index level and T.Bond rate and see what the ERP is right now. I also noted the path of historical implied equity risk premiums, and how they have become more unstable and higher since 2008, mentioning a greater fear of catastrophic risks than ever before. If you are interested in this topic, I wrote a piece about it last week: https://aswathdamodaran.blogspot.com/2024/02/catastrophic-risk-investing-and.html I then extended this approach into other markets, and talked about how to (and tried to) estimate equity risk premiums for other markets, using the country ratings (default spreads) as a building block. You can get my 2024 start-of-the-year equity risk premiums at this link: https://pages.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xlsx As a final step, see if you can find the geographic revenue distribution for your company. You can then use my latest ERP update to get the ERP for your company. If you can find production exposure, even better. You will then have to decide whether you want ERPs based upon production, revenues or a composite of the two. Slides: https://nyu.box.com/s/9ll1t8lwtj6hm9ws1y36pa94qf4sjwrr Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session7atest.pdf Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session7asoln.pdf