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kumardiwesh
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Joined: 26/May/2008
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   Topic: Cost of capital calculation
Posted: 22/Jul/2008 at 3:25pm |
We generally use CAPM to calculate cost of capital.
However, beta measures price risk and not riskiness of cash flows.
We should measure riskiness of cash flows and not price risk to arrive at a discount rate.
I would like to know how Teddies arrive at a discount rate.
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"History does not tell you the probability of future financial things happening" - Warren Buffett
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praveen
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Posted: 21/Aug/2008 at 4:59pm |
One can use a lot of Proxies. One way to calculate unlevered industry BETA and then lever it up based on the company leverage. However one can use a lot of simpler proxies for all practical purposes. One very basic way would be to take the COE at 14-18% (Indian Markets) depending upon stability, size, industry dynamics of the company in question and calculate WACC accordingly.
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kumardiwesh
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Posted: 27/Aug/2008 at 1:13pm |
What would be an appropriate equity risk premium (Rm-Rf) for Indian markets?
What would be the market return (Rm) for Indian markets?
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"History does not tell you the probability of future financial things happening" - Warren Buffett
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basant
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Posted: 27/Aug/2008 at 1:45pm |
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15-10=5% should be my guess.
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praveen
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Posted: 27/Aug/2008 at 2:12pm |
A simple approach is what is a reasonable expectation from Indian equities over the next 10 years.
Most institional investors would be happy with 14 - 16 % over the period. And this is the Rm. 10 year Govt bond yields are at 9% - 10% and your premium is around 5% - 6%.
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Vivek Sukhani
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Posted: 28/Aug/2008 at 6:56pm |
Well, I believe the risk premium has to be a lot higher. Its like this, for 15 p.c. I am not going to take a bet here in this market. If I have got to put my money in a riskier instrument I shall definitely require it to get me far more return than what I could get keeping my funds idle.
Actually, Rm can be different for different people but nonethless I would keep the premium a constant at 7-8 p.c rather than keep the Rm constant.
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Mohan
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Posted: 28/Aug/2008 at 10:44am |
Originally posted by praveen
Most institional investors would be happy with 14 - 16 % over the period. And this is the Rm. 10 year Govt bond yields are at 9% - 10% and your premium is around 5% - 6%.
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Originally posted by VIVEK SUKHANI
Actually, Rm can be different for different people but nonethless I
would keep the premium a constant at 7-8 p.c rather than keep the Rm
constant.
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I agree with Vivek with regards to RM and premium. 10 year bond yields have to come down if the Indian economy has any hopes of growing at 8 - 10 % growth rate without the risk of runaway inflation. WE have seen this recently as bond yields pushed higher ( inflation ran away at much higher rates , but that is a completely different story) and growth rates declined. Actually most institutional investors would be happy to beat the market rate of return 50 % of the time. Anything more is expecting too much from them. If any amongst them are able to earn 12 % p.a. consistently over the longer term ( 10 - 20 years ) they will become the Buffets and Peter Lynch of the future.
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Be fearful when others are greedy and be greedy when others are fearful.
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praveen
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Posted: 29/Aug/2008 at 9:52pm |
Originally posted by Vivek Sukhani
Well, I believe the risk premium has to be a lot higher. Its like this, for 15 p.c. I am not going to take a bet here in this market. If I have got to put my money in a riskier instrument I shall definitely require it to get me far more return than what I could get keeping my funds idle.
Actually, Rm can be different for different people but nonethless I would keep the premium a constant at 7-8 p.c rather than keep the Rm constant. |
In my opinion 8% would be out of whack. May be 5-6 years ago before GS came out with the famous BRIC report. For the developed world Rp is around 4-4.5%. So for emerging market you can add another couple of percentage points at max, which would come down over the next 30 years to match that of developed world Did a small excel work-out
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10 |
20 |
30 |
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| Rf |
8% |
2.2
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4.7
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10.1
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| Rm |
14% |
3.7
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13.7
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51.0
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| Rf |
7% |
2.0
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3.9
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7.6
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| Rm |
12% |
3.1
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9.6
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30.0
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2.2 |
4.2 |
8.4 |
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3.7 |
11.5 |
35.8 |
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This is number of times your investments would become in 10, 20 , 30 years at the specified Rf and Rm The third one is blended of the first 2 and the most realistic (case 1 for first 10 years and case 2 there after) Logic being as and when India gets developed, interest rates, inflation and Rp should come down to more towards developed world) My investment life is atleast another 30 years and for me returns more than justify for that extra risk. Each member can decide for himself.
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