Template-type: ReDIF-Paper 1.0
Author-Name: Stefan Lutz
Author-email: stefan.lutz@manchester.ac.uk
Author-Person: plu92 
Author-Workplace-Name: Economics Departments, Institutes and Research Centers in the World, University of Manchester, UK
Title: Simultaneous determination of market value and risk premium in the valuation of firms
Abstract: Valuing a firm using the discounted cash flow method (DCF) requires the joint determination of the market 
	value of its equity (MVE) together with the equity risk premium (ERP) the firm should earn, since the 
	latter is part of the discount rate used in the calculation of the MVE. This paper presents a theoretical 
	derivation of how MVE and ERP can be calculated simultaneously under fairly general conditions. Besides firm 
	data on free cash flow to equity the only external data needed are the risk-free rate of interest and a 
	parameter indicating the required market risk premium per return volatility.
Keywords: firm valuation, DCF, CAPM, risk premium, transfer pricing.
Note: The views expressed in this paper are those of the author and do not necessarily reflect those of the 
	institutions he is affiliated with. Any information presented is of a general nature and does not address 
	individual circumstances of any particular person or entity. The author would like to thank Nils Holinski 
	for helpful comments and suggestions as well as Nitish Maini and Keshav Goel for diligent research 
	assistance; the usual disclaimer applies. Financial support by the International Centre for Economic 
	Research (ICER), Torino, Italy, and by the Spanish Ministry of Education and Science 
	(Grant No. ECO2008-06191) is gratefully acknowledged.
Classification-JEL: G1, G3, M4
Length: 33 pages 
Creation-Date: 2012
Revision-Date: 2012-10  
Number: 2012-25 
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1225.txt
File-URL: https://eprints.ucm.es/id/eprint/17038/1/1225.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:1225