• How To Estimate The Equity Risk Premium For a Company
  • How To Estimate The Equity Risk Premium For a Company
  • How To Estimate The Equity Risk Premium For a Company
Originally published: 26/03/2018 12:00
Publication number: ELQ-55309-1
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How To Estimate The Equity Risk Premium For a Company

This video analyses and explains the process behind estimating Equity Risk Premiums for individual companies.

In this video you will learn how to calculate the Equity Risk Premium for an individual company.

First of all, Professor Aswath Damodaran sets out his Core Principle for a business. There are two key parts to this principle:

- Risk exposure comes from where a company does business
- The ERP should reflect its operating risk exposure

Aswath gives an overview of how he thinks about ERPs in terms of countries, before showing how this approach can then be translated to the context of an individual business. He breaks this down into a series of four steps:

1. Estimating the implied equity risk premium for S&P 500

2. Assessing the country risk with the local currency rating with Moody's rating scale

3. Converting country risk measure into an additional country risk premium for equity

4. Estimating an ERP for the country

This step by step process will help you to measure risk based on a country and create a total risk premium for each country.

He then turns his attention to individual companies. He analyses the different measures that can be used when calculating the equity risk premium for individual businesses. These are:

- Revenues
- Operating Income or EBITDA
- Production / Operations

Aswath weighs the advantages and disadvantages of these measures against one another, so that you can decide which measure you will use for your business.

He then shows how the Equity Risk Premium can be calculated, using Ambev as an example, making the process easy to understand.

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