Case study - DCF analysis
Hey guys, I'm working on a case study on DCF analysis for a public company. Wonder how you guys would estimate cost of debt and find market risk premium to be used in CAPM. Thanks for the help!
If the firm has long-term straight outstanding bonds, you can use the yield-to-maturity as cost of debt. If it does not, look-up the company's rating and use the typical default spread on bonds with a similar rating. In case none of this is available, use the interest rate on any recent bank borrowing (if you have access to that kind of data). And if none of this works, you can always try to come up with a synthetic rating by copying the credit agencies' methodology and apply the corresponding default spread.
For the market risk premium, I go with the bloomberg function EQRP. If you don't have access, look-up Damodaran's databases: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datacurrent.html
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