Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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24 andTreasurybondrates,butthisanalysiscouldhavebeen
done entirely in the local currency.


Theimpliedequitypremiumschangeovertimemuchmore
thanhistoricalriskpremiums.Infact,thecontrast between
thesepremiumsandthehistoricalpremiumsisbestillustrated
bygraphingouttheimpliedpremiumsintheS&P 500 going
back to 1960 in Figure 2.3. In terms of inputs, we used
smoothedhistoricalgrowthratesinearningsanddividendsas
ourprojectedgrowthratesandatwo-stagedividenddiscount
model. Looking at these numbers, we would draw two
conclusions.


FIGURE 2.3 Implied Premium for U.S. Equity
Market—1960–2005


1.Theimpliedequitypremiumhasseldombeenashigh as
thehistoricalriskpremium.Evenin1978,whentheimplied
equitypremiumpeaked,theestimateof6.50percentiswell
below what manypractitionersuseas theriskpremium in

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