Low risk-free rates and their implications for valuation

• Autor(a) principal: Müller, Lukas Maximilian
• Data de Publicação: 2020
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/105571
• topic: Risk-free rate; weighted average cost of capital (WACC); Discounted cashflows; Equity risk premium; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

The paper discusses implications of prevailing low interest rates ondiscounted cash flow valuations. Applying the traditional theoretical framework can lead to absurd results for intrinsic value. I find evidence that investment banks use artificially high numbers for risk-free rates and equity premia to boost weighted average cost of capital. I argue that valuations that are solely based on discounted cash flows lack meaningfulness in the current environment. They needto be accompanied by other techniquessuchas multiple valuations. In Lisa and minevaluation ofWacker Neuson SEwe did not only “sanity-check”the DCF price target but used anequally weightedblended price target of DCF and multiplesas a result of these findings.