What is the Company Risk Premium (CRP)?
The CRP is the additional return investors require for bearing the systematic risk of a specific company. It measures the firm's exposure to market-wide fluctuations.
It is calculated by multiplying the Market Risk Premium (MRP) by the company's Levered Beta (β).
How is CRP Used in WACC?
The CRP is the risk component of the Cost of Equity in the Capital Asset Pricing Model (CAPM):
Why is CRP Important?
Quantifies Systematic Risk: It measures the compensation investors require for the company's non-diversifiable systematic risk (market sensitivity).
Industry Factor: The value of β is largely determined by the company's industry volatility.
Low-Beta Industries (β < 1.0): Tend to be less volatile (e.g., Utilities, Consumer Staples), resulting in a lower CRP.
High-Beta Industries (β > 1.0): Are typically more sensitive to economic cycles (e.g., Technology, Cyclical Consumer Goods), leading to a higher CRP.
Hurdle Rate: It raises the WACC, which acts as the minimum required return (hurdle rate) for new investments, ensuring projects compensate shareholders for the specific level of systematic risk they bear.