This equity risk premium (ERP) study for the United States follows up on our research into ERPs in the Netherlands, Belgium, and Luxembourg (the Benelux). In that market, we had observed that income approach (DCF) valuations sometimes differed from market approach (multiples-based) valuations. We discovered that traditional methods for measuring ERP sometimes resulted in discount rates that were too low, which led to our 8 year study into ERPs in various markets.
Our approach begins with an analysis of the subject market, which allows us to rationalize the results of our research for each market. We then apply multiple approaches to measure ERP.
One of our approaches, the Credit Spread ERP, is a proprietary approach developed by the author. In addition to Credit Spread ERP, we apply Implied ERP and Historical ERP approaches, and we comment on ERP Surveys. This book provides equity risk premium from multiple perspectives and provides a range of possible outcomes.