Valuation Across Time
Valuing all companies becomes more complicated in an unsettled macroeconomic environment. In fact, three basic inputs into every valuation—the risk-free rate, risk premiums, and overall economic growth (real and nominal)—can be volatile in some cases, making it difficult to value any company. In this section, we will look at the reasons for volatility in these fundamental inputs and how they can affect valuations.
To value a risky asset, we have to answer a fundamental question: What can you expect to earn as a rate of return on a riskless investment? The answer to this question is the risk-free rate. Although we take it as a given in most valuations, it can sometimes be difficult to identify. When the risk-free ...