Introduction to Corporate Finance

PART 2: VALUATION, RISK AND RETURN

finance in practice

GLOBAL ESTIMATES OF THE MARKET RISK PREMIUM

In 2014, Fernández, Linares and Acin conducted

a survey across a number of countries to assess

market risk premium (MRP) in different markets.

They also surveyed professors, analysts and

managers of companies and found significant

divergences across these groups. The following

table shows the results for 88 countries. It shows

that in general, companies in emerging markets

tend to use a relatively higher market risk premium

than those in more developed markets. This

reflects their perception that the developed

markets are less risky.

TABLE 7.2 MARKET RISK PREMIUM (MRP) USED FOR 88 COUNTRIES IN 2014 BY PROFESSORS,

ANALYSTS AND COMPANIES

Average (%) Median (%) Standard dev. (%) Min. (%) Max (%)

1 US 5.4 5.0 1.4 1.5 13.0

2 Spain 6.2 6.0 1.6 2.0 13.0

3 Germany 5.4 5.0 1.7 1.0 12.4

4 UK 5.1 5.0 1.4 1.5 12.8

5 Italy 5.6 5.5 1.5 2.0 10.1

6 Canada 5.3 5.0 1.2 3.0 10.0

7 Mexico 7.4 6.7 2.4 3.0 15.0

8 Brazil 7.8 7.0 4.2 1.8 25.0

2

2.5

3

3.5

4

4.5

5

Market risk premium forecast (%)

Market risk premium expected by corporate CFOs

2000 Q3 2001 Q32002 Q32003 Q32004 Q32005 Q32006 Q3 2007 Q32008 Q32009 Q32010 Q32011 Q1