Corporate Finance MBA Spring 2021 - Session 7: Equity Risk Premiums & First steps on betas

Today's 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. 1. Survey Premiums: I had mentioned survey premiums in class and two in particular - one by Merrill of institutional investors and one of CFOs. You can find the Merrill survey on its research link (but you may be asked for a password). You can get the other surveys at the links below: CFO survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422008 Analyst survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2450452 2. Historical Premiums: We also talked about historical risk premiums. To see the raw data on historical premiums on my site (and save yourself the price you would pay for Ibbotson's data...) go to updated data on my website: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html On the same page, you can pull up my estimates of country risk premiums for about 150 countries from January 2020 http://www.stern.nyu.edu/~adamodar/pc/ctryprem.xls The approach that I use for computing country risk premiums at the start of 2020 is described more fully in this post: https://aswathdamodaran.blogspot.com/2020/02/data-update-4-country-risk-and-currency.html 3. Implied equity premium: Finally, 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 2020 update: http://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb21.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. 4. Company revenue exposure: 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. Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfspr21/session7slides.pdf Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session7atest.pdf Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session7asoln.pdf