I was doing a DCF model. Do I use current 10-year US treasury yield, or it should be the historical average? And does beta suppose to be lower for companies with low or no debt? What market risk premia is used, current or also average?
Rf1 + beta*( market return- rf2) Rf1 is the current short-term risk free - can be found on Bloomberg. Rf2 is the historical average risk free ( arithmetic is forward-looking; geometric is not. you can use either) you can download from WRDS CRISP monthly for 5 years or 10 years. As to beta, you can check bloomberg 2year or 5year. Personally I like to use multiple resources, including running a regression with downloaded daily price data. Leverage, is one of the factors that can impact beta but you can’t say beta is definitely lower for a company with low or no debt. There are other factors that affect beta, for example a small-cap company might have a higher beta due to liquidity issues. Anyone has a different approach/thoughts?
Can you use just Market Premia in a CAPM model without deducting Rf from Market Return? Historical rf seems to be justified as it accounts for different cycles, but FED recently announced that they are going to maintain low rates till at least 2022.
Beta, for the company I’m doing research on, is comparatively high. The peers with similar margins and business model have lower beta, whereas the ones with high debt have significantly higher Beta. Looking at technical side of it, I’m guessing that this high beta is the result of one time significant price movement (100% up and down) two years ago, that increased its volatility. However it is one time movement, and there is a low likelihood of it happening in the near term.
Also should I include small cap premium if the market cap is $1-2 billion. Bid-ask spread is 0.3%.