anonymous
  • anonymous
Hi Aswath or anybody who can help me^^, I am valuing an oil and gas company traded on the FTSE 100 and I am trying to determine its cost of equity. I am wondering if I can use the US market premium adjusted with a small Uk market spread, the US risk-free rate but a beta coming from the regression between the FTSE 100 and the stock of my company? If it is ok, I have another question. I did a regression bewteen the sales in USD and the oil price in USD to determine how they have been moving together, and then try to forecast more precisely the future sales in USD of the company. Could I use the
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schrodinger
  • schrodinger
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anonymous
  • anonymous
cost of equity above-mentioned to compute the cost of capital of my firm? and then can I discount my future Cfs in USD with it?
anonymous
  • anonymous
Thanks you in advance
anonymous
  • anonymous
First, oil companies generally should be valued in US dollar terms, since the oil market is a dollar-based market and the reporting is often done in US dollars. That will allow you to start with the US treasury bond rate as your riskfree rate. Use a mature market premium (US risk premium) and the beta for the oil sector. Don't mess with regressions.

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anonymous
  • anonymous
Ok, thank you. I was also wondering, why should we use a 10-year T-bond? Why not a 30-year one for instance since we compute the terminal value as a perpetuity? Is it a way to normalize the future rate fluctuations? or maybe it is the usual investment horizon? I am currently reading your book "Investment Valuation" and some articles (such as "Valuing cyclical and commodity companies"), and you seem to prefer using long historical data to compute risk premiums, for instance to remove the noise within short-term data, but what about using weekly data over a 5-year period to better assess the current market trend when valuing? does it remove the noise? (One of our finance professors prefers using short-term data...)

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