Damodaran posts 2019 edition of ERP paper

BVWireIssue #201-4
June 26, 2019

cost of capital
cost of capital, discount rate, private company valuation, risk analysis, cost of equity, equity risk premium (ERP)

The “dean of valuation,” Professor Aswath Damodaran (New York University Stern School of Business) has posted “Equity Risk Premiums (ERP): Determinants, Estimation and Implications—The 2019 Edition.” The 135-page paper is the 11th update of this work, which provides a detailed picture of ERPs as well as a great deal of data, which are all free. In general, there are two approaches to estimating ERP: the ex post approach (using historical information) and the ex ante approach, which is forward-looking. Damodaran is a strong proponent of the use of the ex ante approach, or “implied” ERPs, which are forward-looking estimates that are extracted by examining stock prices today and expected cash flows in the future. Damodaran’s implied ERPs are one of the options available in BVR’s Cost of Capital Professional online platform for estimating the cost of equity. In his paper, Damodaran seeks to dispel what he calls widely held misconceptions about equity risk premiums. One of them is that ERP estimation services “know” the risk premium. Historical data are available to everyone, so “there is no reason to believe that any service has an advantage over any other, when it comes to historical premiums,” he claims.
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