Cost of capital

Analysis of the ever-changing price of money.

Stock prices fell last fortnight. The S&P 500 index of big American companies dropped 2% to 5,447. The index offers an 8.5% annual expected return at the current price.

According to 𝑉𝑎𝑙𝑢𝑎𝑏𝑙's discounted cash flow model, the S&P 500 is worth about $5,102 per share. This model, which relies on analysts' consensus estimates for each company in the index and a stable payout ratio based on the index's average return on equity, suggests that investors have overvalued the index by 7%. That’s down from a 14% overvaluation last fortnight.