The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Conclusion

The prices that we assume investors charge for bearing risk in equities (equity risk premium) and being exposed to default risk in debt (default spreads) have a significant effect on the values we estimate for individual assets. In far too many valuations, analysts either depend on outside services (Ibbotson, Standard & Poor’s) for these numbers or use values that are not feasible (equity risk premium less than zero, cost of debt less than the risk-free rate).

This chapter laid out the determinants of both equity risk premiums and default spreads and noted that both are likely to change over time. We also looked at three potentially problematic scenarios. First, in markets with limited or no historical data, the standard approach ...