Chapter 15 P&C Insurance Company Valuation - R. Goldfarb
Discount rate
- CAPM (15.1) and it’s components
\(\star\) Growth rate
- Table 15.1 for each of the 3 method and it’s components
DDM:
DDM formula (15.2)
Terminal value formula uses CF at 1 and gets you to time 0
Select \(g\) by average of \(ROE\) (usually \(\rho\) is given)
- If not then select \(\rho\) too by average of \(\rho = 1 - \dfrac{\mathrm{E}[Div_1]}{NI}\)
FCFE:
FCFE formula (15.3)
Discount all the FCFE for \(V_0\)
Select \(g\) by average of \(ROE\) and reinvestment rate
Advantages
FCFE vs FCFF
AE:
-
Remember to add the \(BV_0\)
Clean surplus assumption
Advantages
Considerations
Option Pricing