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Q: How do you calculate market risk premium for a firm?

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The market risk premium is measured by the market return less risk-free rate. You can calculate the market risk premium as market risk premium is equal to the expected return of the market minus the risk-free rate.

There is a calculator on the Internet at the site referenced below.

Banks are currently using 8% market risk premium. Data as of Feb, 2013.

11.51%

If the required rate of return is 11 the risk free rate is 7 and the market risk premium is 4 If the market risk premium increased to 6 percent what would happen to the stocks required rate of return?

When one has market risk premium he/she is willing to take an financial risk. The risk premium is how much value stocks should return over a risk-free investment. Stocks are considered a higher financial risk (and possible a faster gain) opposed to, for instance, bonds.

The current estimated market risk premium of Australia is 8 percent. This is within the regulatory period January 2010 to June 2014.

It is the return you are expected to make by putting your money into Equity(stocks) Over what the current Risk free rate is. For example the Risk free rate (30 YR T-Bonds) is at 3.8% right now, and I think the S&P 500 is going to return around 8%, so 8 - 3.8 = 4.2% Market Risk Premium. It depends on how you calculate future expected returns and all firms calculate it in different ways.

No- the market risk premium is the slope of the Security Market Line (SML).

I'm going to assume that you mean the risk free rate is 4%, or 0.04, and the market rate of return is 14%, or .14. If that is the case, then we solve: Market Rate of Return = (Risk Free Rate) + Beta * (Market Risk Premium) 0.14 = 0.04 + 1.2 * MRP 0.1 = 1.2 * MRP 0.1 / 1.2 = MRP 0.08333... = MRP The Market Risk Premium would be approximately 8.33% This is an example of the Capital Asset Pricing Model, or CAPM.

Expected return= risk free rate + Risk premium = 11 rate of return on stock= Riskfree rate + beta x( expected market return- risk free rate)

Value of the common stock will go down.As market becomes riskier market participants adjust expected risk premium and start to demand higher returns, consequently they begin to sell stocks as they do not satisfy their newly adjusted expected risk premium. As a result stock price goes down.

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