`June 6, 2024

Kroll Lowers its Recommended U.S. Equity Risk
Premium to 5.0%, Effective June 5, 2024
Executive Summary
Kroll regularly reviews fluctuations in global economic and financial market conditions that may warrantchanges to our equity risk premium (ERP) and accompanying risk-free rate recommendations. The riskfree rate and ERP are key inputs used to calculate the cost of equity capital in the context of the Capital
Asset Pricing Model (CAPM) and other models used to develop discount rates. We also update country
risk data on a quarterly basis for 175+ countries using various models.
The Kroll Recommended U.S. ERP is decreasing from 5.5% to 5.0% when developing USDdenominated discount rates as of June 5, 2024, and thereafter, until further notice.
Notwithstanding the current recommendation, we are monitoring economic and geopolitical events that
may change our views and impact our guidance toward the end of 2024 and into 2025. In particular, theU.S. Presidential Election in November 2024 has the potential to cause turmoil in U.S. and global financial
markets. Of particular concern is any potential promise of a significant increase in government spending
and a corresponding rise in the U.S. budget deficit, which could place upward pressure on long-term
interest rates and disrupt financial markets. Other global geopolitical events that warrant close watch
include, but are not limited to, the impact of general elections in other major economies (e.g., Mexico, India,UK), trade conflicts between the U.S. and China, rising tensions in the Middle East and the protracted
Russia’s war on Ukraine.

Background
The Kroll U.S. Recommended ERP was last changed on June 8, 2023, when it was lowered from 6.0% to5.5%. This ERP guidance was applicable when developing USD-denominated discount rates and was tobe used in conjunction with our U.S. risk-free guidance—the higher of the spot 20-year U.S. Treasury yield(prevailing as of the valuation date) and the Kroll normalized U.S. risk-free rate of 3.5%.

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In the “Kroll Cost of Capital Recommendations and Potential Upcoming Changes – February 8, 2024Update”, Kroll reaffirmed its Recommended U.S. ERP guidance at 5.5%. However, that communication
also indicated that a “risk-on” attitude in U.S. equity markets meant that the ERP was likely to come downin 2024. At the time, we balanced new stock market record highs (which were partly boosted by optimism
around generative artificial intelligence (GenAI), an expected improvement in earnings growth and aresilient U.S. economy), with the potential negative impact from restrictive monetary policies (keeping
interest rates higher for a longer period of time) and the risk of major geopolitical events broadening to theglobal economy (e.g., escalating conflicts in the Middle East).
At this juncture, the U.S. economy continues to be resilient, but there are signs that the labor market iscooling, and consumer spending is slowing. These latest indicators actually increase the probability of asoft-landing scenario (i.e., lower inflation, lower real growth, but no recession) and create the conditions
for the U.S. central bank (the Federal Reserve Bank, or the Fed) to start cutting interest rates. This, in turn,is likely to create more favorable financing conditions and continue to support U.S. equity markets.
Based on current economic and financial market conditions, the Kroll Recommended ERP is being
lowered from 5.5% to 5.0% when developing USD-denominated discount rates as of June 5, 2024, andthereafter, until further notice. In addition, we continue to recommend using the spot 20-year U.S.
Treasury yield as the proxy for the risk-free rate if the prevailing spot yield as of the valuation date is higher
than the Kroll normalized U.S. risk-free rate of 3.5%.
The decision to lower the U.S. ERP Recommendation is based on the following trends in economic
indicators and financial market conditions:In late 2023 and early in 2024, investors began pricing several cuts in the Fed funds rate—thecentral bank’s policy interest rate—which helped fuel a surge in equity markets. However, asurprising resilience in the U.S. economy and a sudden increase in inflation readings in December
2023 and again in February and March 2024, led to a delay in expectations on the number andtiming of Fed rate cuts in 2024. Markets reacted by pricing a single-rate cut later this year (contraryto prior expectations of three cuts taking place earlier in the year), with some economists evensuggesting a rate hike as a possibility. More recently, however, economic activity has shown signsof slowing down. First quarter real GDP growth was downwardly revised to 1.3%, partly due to adeceleration in consumer spending, as pandemic-related excess savings have been mostly
depleted and the overhang of inflation has diminished purchasing power. This slowdown (togetherwith the inflation and unemployment trends discussed below), actually makes it more likely that
the Fed will begin cutting interest rates earlier this year relative to recent expectations.

2Major equity indices have recently reached new all-time highs, supported by investors’ continued
optimism. The surge in technology stocks due to potential productivity gains from GenAI has
broadened to other sectors in the economy. Since their respective cycle lows in late October 2023
through May 28, 2024, the S&P 500 Index (a market-cap-weighted index) has increased 28.9%
in price terms, whereas the NASDAQ Composite surged by 35.1%. The S&P 500 Equal-WeightIndex also gained 22.9% since its October low. For perspective, a 20% or higher increase in equity
markets relative to recent lows is considered to be a “bull” market. In addition, during the monthof May 2024, all major equity indices reached all-time highs: the S&P 500 Index hit a new record
on May 21, 2024, while the NASDAQ Composite did so on May 28, 2024. The Dow Jones
Industrial Average (DJIA), an equal-weighted index that no longer attracts significant global
investment allocations, surpassed the psychological level of 40,000 for the first time on May 17,2024.1

The VIX (the volatility index on the S&P 500), also referred to as the “fear index,” has been
generally low during 2024. Since the beginning of 2024 through May 28, the index has averaged
14.1, with a low of 11.9 reached on May 21, 2024—the lowest level since November 2019. Theselevels are also much lower than the long-term historical average of 20.1 and the average observed
since the height of COVID-19. For perspective, during 2022 and 2023, the VIX averaged 25.6 and16.8, respectively.

U.S. corporate credit spreads have been fairly tight and are currently lower than in June 2023,
when we last changed our ERP recommendation. They are also significantly lower than their longterm historical average (from late 1996 through the present). The underlying corporate yields on
investment-grade and speculative-grade bonds have generally been on a downward trend since2023.

ERP indications from forward-looking models based on Professor Aswath Damodaran are atsimilar levels as when we last changed our U.S. ERP recommendation, while the Default Spread
model points to a sustained decline in ERP.

According to an analysis by S&P Dow Jones Indices, at the end of 2019, there were over USD 11.2 trillion index-linked products
and derivative contracts benchmarked to the S&P 500, which included USD 4.6 trillion passively tracking the index. In comparison,
there were USD 32 billion benchmarked to the DJIA, which included USD 28 billion in passive assets. For more details see “Comparing
Iconic Indices: The S&P 500® and DJIA®”, S&P Dow Jones Indices – A Division of S&P Global, June 2021. Available here:
https://www.spglobal.com/spdji/en/documents/education/education-comparing-iconic-indices-the-sp-500-and-djia.pdf.
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Even though the U.S. unemployment rate has increased recently, it is still relatively low on ahistorical basis: in April 2024, the unemployment rate ticked up to 3.9%, from 3.8% in March 2024
and from 3.4% in April 2023, a post-pandemic low. For perspective, unemployment rates of 3.4%
were last observed in the late 1960s. The persistence of low unemployment is one of the major
reasons why economists believe that a soft landing is achievable, and the probability of a U.S.
recession in the near term is relatively low. During past recessions, the unemployment rate saw
significant increases. In the U.S., the average unemployment rate during a recession is 6.3%, which
is far above the current level.

Inflation, as measured by Consumer Price Index (CPI), is still above the Fed’s 2.0% target, but far
below its multiple-decades high of 9.1% (before seasonal adjustments) in the 12-month period
ending in June 2022. The process of disinflation has been a bumpy one, supporting the Fed’s
decision to keep interest rates at their current high level for a longer period. In June 2023, CPI
inflation reached a local low of 3.0%, only to continue moving range-bound between 3.1% and3.7%. The latest CPI inflation was 3.4% as of April 2024, a downtick from the prior month and awelcome reading after two consecutive months of rate acceleration. The Fed’s preferred gauge for
inflation, the Personal Consumer Expenditures (PCE) Price Index, has actually accelerated in Marchto 2.7% and remained at that level in April 2024. The core PCE index (i.e., excluding food andenergy) dropped to 2.8% in February, but has remained at that level since then. Nevertheless,wage price pressures appear to be easing and the cooling job market may bode well for inflation
trends.

Notwithstanding these positive factors that support a decrease in the U.S. ERP, we are monitoring
economic and geopolitical events that may change our views and impact our guidance toward the end of2024 and into 2025. In particular, the U.S. Presidential Election in November 2024 has the potential tocause turmoil in U.S. and global financial markets. The growing level of government debt in the U.S.,
especially in an election year when candidates propose different fiscal packages to sway voters, may
worsen the fiscal position for the country and create upward pressures on long-term interest rates. The
acrimonious political debate regarding the debt ceiling that took place in the first half of 2023 was acontributing factor to Fitch Ratings’ decision to lower its U.S. sovereign credit rating from AAA to AA+.
S&P Global Ratings had already downgraded the U.S. credit rating to AA+ back in 2011 under similar
circumstances. Moreover, Moody’s Investor Services, the last major credit agency assigning the coveted
Aaa rating to the U.S., has lowered its outlook, citing political and financial concerns. Therefore, this will be
an area that will warrant close monitoring. Other geopolitical events with potential for escalation to global
markets will also be monitored.

4Summary of U.S. Cost of Capital Recommendations
Kroll is lowering its Recommended U.S. ERP from 5.5% to 5.0% when developing USDdenominated discount rates as of June 5, 2024, and thereafter, until further notice. This is matchedwith the higher of the spot 20-year U.S. Treasury yield as of the valuation date and the Kroll normalized
U.S. risk-free rate of 3.5%.

Regarding risk-free rates, as investors attempt to predict the pace and magnitude of potential rate cutsby major central banks, we continue to observe high levels of volatility in spot yields of government
bonds of major economies. Long-term bonds yields may continue to fluctuate considerably in the near
future, before stabilizing. During these periods, project teams may need to consider using a moving
average of spot yields to mitigate the impact of this volatility in their valuation analyses (e.g., weekly
or monthly averages).

Notwithstanding the current recommendations, we are monitoring economic and geopolitical events
that may change our views and impact our guidance toward the end of 2024 and into 2025. In
particular, the U.S. Presidential Election in November 2024 has the potential to cause disruption in U.S.
and global financial markets. Of particular concern is any potential promise of significant increases ingovernment spending that lead to a significant rise in the budget deficit, which could place upward
pressures on long-term interest rates and disrupt equity markets. Other global geopolitical events thatwarrant close watch include, but are not limited to, the impact of general elections in other major
economies (e.g., Mexico, India, UK), trade conflicts between the U.S. and China, rising tensions in theMiddle East and the protracted Russia’s war on Ukraine.

Please contact our support team with any questions: costofcapital.support@kroll.com

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