10 year government bond yields increased on February 2, 2018 due to strong economic indicators. On the other hand, there was a decline in the US stock market. How does the rise in bond yields affect the value of the company?
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Bond Yields and Company Valuation
Source : Reuters, Besfin Financial Services & Consultancy
Weighted average cost of capital used in discounted cash flow method when valuing a company is closely related to 10 year government bond yields. As bond yields increase, WACC increases as well. Therefore company values and stock prices decrease. The increase in bond yields does not have the same effect on all companies. Value of companies with higher debt to equity ratio decreases less while value of companies with lower debt to equity ratio decreases more. The table below shows an average of S&P 500 companies.