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    Valuation Masterclass 3 - Risk Free Rate

    Uploaded by

    Vedant Gosai

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Valuation Masterclass 3 - Risk Free Rate

    Uploaded by

    Vedant Gosai
    6 views18 pages

    Copyright

    © © All Rights Reserved

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    PDF, TXT or read online from Scribd

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    Copyright:

    © All Rights Reserved
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    6 views18 pages

    Valuation Masterclass 3 - Risk Free Rate

    Uploaded by

    Vedant Gosai

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 18

    -

    nation School

    i
    were
    Es I

    DF-Risk Free Rate


    Goodmorning!
    I
    Hey,

    -
    In part 2 (link in post above) we

    understood three pillars of DCA

    - Cash flow, Growth, and Risk.


    will deep dive on
    Today, we
    -

    Risk and Risk Free Rate.

    need to build
    -

    But before we

    foundation.
    strong start
    Let's
    Risk -

    - Risk - It is deviation from expected


    Therefore, both upside or
    Resulted.
    is Risk.
    downside deviation

    - Risk averse -
    In valuation, we

    that Investors are risk


    assume

    Averse, which means they are


    to take riskfor appropriate
    ready
    Return
    Risk in DCF I

    - Risk in DC is catered
    through
    discount Rate i.e. WACC

    -
    WAC is
    weighted Ang cost of capital

    (e) -)
    +
    --

    Let's start with cost of


    Equity
    -
    cost of
    Equity
    If know, cost of debt is
    -

    you face of
    explicit ie. written
    on

    debt Instrument.

    -
    But that is not the case with
    cost of
    Equity. It is implicit
    means not mentioned anywhere

    cost of Equity Returns expected


    =

    (for company) shareholders


    Equity
    by
    cost of
    Equity (Ke) ->

    Ke= Risk free, Equity X


    Bett
    Rate Risk
    ↳
    premium
    ↓ b Returns
    for
    Returns to
    Returns expected assume Risk system -

    atic
    without
    assuming in
    Equity Risk
    Risk market of
    Any
    country
    we will learn about ERP & Beta in
    next session.
    -
    Risk Free Rate

    It is return on Risk free Investment

    Risk free Investment


    -
    freefrom

    / -
    Default Reinvestment

    ↳No
    Risk
    I Risk
    No Risk due to
    Risk of
    default Reinvestment.
    -

    - In order to calculate Risk


    free Rate;we need to negate

    Default Risk and ReinvestRisk

    -
    To Negate Reinvestment Risk
    Keep Tenure of Risk Free Band
    and cash flow projection equal.
    cash flew
    - Since we value company's
    for perpetuity but still 10yr Band Rate
    is preferable due to
    highest liquidity
    To Negate Default Risk -

    Reduce default spread of country


    from local 10 year gort Band.

    i.e.

    Rate
    I I
    lovear-India's
    I

    ) gart default
    #
    Band (E) spread.

    ↳it's understand 3 ways to calculate


    India's Default spread.
    I

    whatis Default spread?


    So, we need to reduce default
    spread tram Indian loy gort band
    Yield.
    Because, probability that Indian

    is
    default not zero.
    government may

    It is
    usually assumed developed
    countries has zero of default
    probability
    Free Rate.
    :
    their loy gort yield-Risk
    How to calculate Default spread-
    for India.

    There are 3 to calculate


    ways
    -

    India.
    Default Risk spread of
    is credit defaultspread (CDS)
    USD Bond of USA.
    iii) compare with

    look up method.
    (ii) country Rating
    Breakdown all
    Let's three methods
    one by one.
    Defaultspread of India -

    is credit Default spread (CDS)


    -
    CDS is measure of country's default
    Risk and itis traded in ox market

    i
    available n
    esmates usually
    are
    -

    -
    India's CDS Rate = 2.69%

    Risk
    :India's Free Rate (CDS method)
    10 year Indian Bond-CDS Spread
    7.120 -
    2.69 4.45%
    =
    I
    iii) country Rating lookup

    - India's Rating
    country as per

    sep is 3
    CDS of Baa3 Rated
    on an
    average
    -

    countries is 1.90%

    .
    India'sRisk Free Rate through this
    method is

    0 7.12-1.90% 5.22%
    =

    Gs Investing.com.
    iii)compare USD Bond ->

    In this method we compare loyer


    Bond with
    USD Issue
    by our
    country
    USD Bond issued by USA.
    loyeal

    I say issued
    India loy use bond
    at 10%; whereas loy Bond by
    7.57.
    USA:

    2.57. extra return


    gave
    Here, India
    on same bond due to default Risk
    of India ...
    Default spread-
    2 .5.
    I

    some key points to Remember

    - Never do Historical Average of


    Risk Free Rate.

    -
    Risk free rate is currency specific
    valuing Indian
    means If you are an

    in Swiss francs. We need


    company
    to calculate and use Risk free
    Rate of Switzerland and not India

    Be mindful of these facts.


    -

    2 Important things
    ii) free financial
    start
    watching
    our 4T channel
    modeling course on

    iii) join our whatsapp community


    to updates and Exclusive
    get
    Invite of
    Regular LVE sessions

    Irink of Both in comments)


    -

    and
    Hope you are
    enjoying
    learning from this master days

    selies.

    need
    - I motivation
    through
    umments
    -
    and
    posts
    -

    It will help me to create more

    -
    content.
    Qually
    REPOST -
    To help others

    SAVE - To Revise later

    follow -
    your man 'Parth'

    for premium finance


    content.

    miss
    Don't session
    LIVE
    today
    I link in post above)

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