Case Study

8. Equity and Corporate Valuation – Mr. Gaurav Shetty

Gaurav is an Equity analyst and frequently updates economic parameters as part of his job role at Akatsuki Inc. These economic parameters help in equity valuation.

The company had been using an Equity risk premium of 5.5% derived using historical estimates. By evaluating yields on Nominal vs Real bonds, Gaurav estimates Inflation rate to be 3.6%. As per Economic data released, Real GDP growth rate is expected to be 4.0%. The expected change in P/E ratio, given the markets are overvalued as per his expectations are 5%. The expected Risk free return is 2.8% and expected return on market is 1.8%.

Gaurav is questioned by Akshay, one of the analysts in his firm on the effects of survivorship bias on estimates of Equity risk premium. Akshay wishes to know amongst Historical, Gordon growth and Survey estimates, which amongst them is most susceptible to survivorship bias ?

Gaurav wishes to evaluate the required return for Poise Infotech (PI) using CAPM and the Fama French Model. He uses information in the below table.

Factor Factor Sensitivity Risk Premium

Market 0.94(historical) 5.5%

Size -0.86 3.4%

Liquidity 0.30 1.2%

Value -0.05 5.6%

More Details: Thakur Institute of Management Studies & Research