Presenta: Marco Morales, Universidad Diego Portales.
Abstract:
Following the risk-neutral valuation literature, based on the change in probability measure for cash flows to shareholders, it is possible to obtain the value of a company’s equity (or its shares) by discounting the expected flows by the risk-free rate of return. This value should be equivalent to discounting the expected flows under the effective probability distribution, using the rate required by shareholders (which includes a risk premium). In this way, based on the simulation of a binomial model, using the relationship between effective and risk-neutral probabilities, it is possible to find the rate of return demanded by shareholders. In this case, the necessary inputs are only the risk-free rate of return and the volatility of cash flows. That is, it is a methodology that does not require any particular Asset Pricing model.
