Cost of Capital in the Current Environment
September 2023 Update“In this edition, we are happy to introduce real GDP growth estimates for Canada and Brazil. Major central banks are approaching the peak for their policy interest
rates. However, while headline inflation has decelerated significantly, core inflation (i.e., excluding the volatile energy and food prices) continues to be stubbornly
high, which means interest rates will stay higher for a longer period. The global economy appears to be more resilient than expected at the beginning of 2023.
Nonetheless, as high interest rates continue to bite into consumers’ pockets and businesses’ capital budgets, a slowdown is expected in late 2023 and early 2024,with some countries expected to dip into recession. Global financial markets are generally pricing a soft landing rather than a deep and prolonged recessionary
period. Amid this uncertainty, cost of capital estimates are now similar to levels observed around the Global Financial Crisis of 2008–2009.

”

Carla S. Nunes, CFA – Managing Director, Valuation Digital Solutions, Kroll

Kroll Cost of Capital Inputs

Total Assets Held by Major Central Banks Over Time

Data as of September 18, 2023

Normalized
Risk-Free Rate

Data as of September 18, 2023

Kroll-Recommended
Equity Risk Premium% Change$30.0

After COVID-19

U.S.

(in USD)Higher of
3.5% or
Spot*

5.5%

Higher of
3.0% orSpot**(in EUR)

Eurozone ****5.5%
to6.0%We recommend using the spot 20-year U.S. Treasury yield as the proxy for the riskfree rate, if the prevailing yield as of the valuation date is higher than ourrecommended U.S. normalized risk-free rate of 3.5%. This guidance is effective whendeveloping USD-denominated discount rates as of June 16, 2022, and thereafter.

**We recommend using the spot 15-year German government bond yield as the proxy
for the risk-free rate, if the prevailing yield as of the valuation date is higher than ourrecommended German normalized risk-free rate of 3.0%. This guidance is effective
when developing EUR-denominated discount rated as of October 18, 2022, andthereafter.

Assets Held by Central Banks (in USD trillions)Feb 2020 – Sept 2023

72%-6%
49%
95%

Bank of England$25.0

Bank of Japan$20.0

European Central Bank
U.S. Federal Reserve

USD 21.8 Trillion
COVID-19 Begins$15.02008 Global Financial Crisis

$10.0

$5.0

$0.0

*** German normalized risk-free rate and Eurozone equity risk premium (ERP) for use in
EUR-denominated discount rates from a German investor perspective. Our current
ERP recommendation is at the top of the range. Additional country risk adjustments
may be warranted when estimating discount rates for other countries in theEurozone.
Sources: Capital IQ, FRED® Economic Data, Bank of England, Bank of Japan and European Central BankFor more information, visit: https://www.kroll.com/costofcapitalnavigator

Global Market Volatility
Data as of September 18, 2023

VSTOXX® (Europe)

80.9

Max during
COVID-19 crisis

82.7

87.5
85.6

20.1
14.0

16.2

Eurozone

Current
level

23.6

Global Credit Spreads

6.7%

Long-term
average

7.7%

3.7%

Current
level

3.75%

11.25%FTSE 100EurozoneGermany

Netherlands

2.79%

2.72%

3.06%

France

Spain

Italy

3.14%

3.39%

4.42%

3.4%

Sources: Capital IQ, FRED® Economic Data, Bloomberg
U.S. corporate credit spreads are based on the difference in effective yields between the ICE BofA
U.S. High Yield Index and the ICE BofA U.S. Corporate Index. Euro-denominated corporate credit
spreads are based on the difference in effective yields between the Bloomberg Pan-European High
Yield Index (EUR) and the Bloomberg Euro Aggregate Corporate Bond Index. Long-term averages
are based on 1995 to present for VIX daily series, 1999 to present for VSTOXX daily series, 1996 topresent for U.S. credit spread daily series, and 1998 to present for EUR-denominated credit spreadmonthly series.

U.S. and Eurozone Consumer
Sentiment vs. Business Confidence

0.9%

UK

-5.1%

TOPIX

-5.5%

S&P/ASX 200-5.6%

IBEX 35

Japan

Australia
Spain

-8.7%

S&P TSX-9.5%

CAC 40

CanadaFranceDAX-12.3%

GermanySTOXX® Europe 600-12.9%

Europe-19.4%

S&P 500-19.8%MSCI ACWI

U.S.

World

CSI 300

Sweden

4.47%

1.10%

2.87%

China

2.47%

7.19%

Japan

Singapore

South Korea

3.34%

Spain

15.2%

S&P 500

India

4.22%
0.72%

U.S.

28.4%
16.0%

Japan

Switzerland

Australia

China

TOPIX

UK

5.1%

2.6%

4.4%

4.32%

IBEX 35

Since the Beginning of 2023

Max during
COVID-19 crisis

India

BSE Sensex-21.6%
Europe – Other

18.8%

14.9%

4.7%

BrazilEuro-DenominatedCorporate Credit Spreads

Asia Pacific

Max during
2008 global
financial crisis

BrazilCanadaData as of September 18, 2023

U.S. Corporate
Credit Spreads

IBOVESPAU.S.

Calendar Year 2022

Max during
2008 global
financial crisis

Long-term
average

Data as of September 18, 2023

Data as of September 18, 2023

Americas

VIX Index (U.S.)

Stock Market Performance

Global 10-Year Government Bond Yields

4.00%

DAX

13.0%

CAC 40France12.4%

MSCI ACWI
World

12.3%

Germany

BSE Sensex

11.1%

India

IBOVESPA
Brazil

7.8%

STOXX® Europe 600
Europe7.5%

S&P TSX

5.7%

CanadaSources: Refinitiv (Brazil, India), European Central Bank (Eurozone aggregate yield) andCapital IQ (other countries)

FTSE 100

UK

2.7%

S&P/ASX 200

Australia

2.7%

-3.7%

China

Source: Capital IQ

CSI 300

Long-Term Inflation Expectations (Median)
Data as of September 18, 2023

Data as of September 18, 2023

Pre-COVID-19(February 2020)

Consumer
Sentiment

101.0
108.0

Business
Confidence

99.0
100.3

Post-COVID-19(August 2023)

67.7
89.6
99.0
95.9

Long-Term Avg.
(1952–2023)

85.6(1985–2023)

100.0(1950–2023)

100.0(1985–2023)

100.0

U.S.

Germany

2.4%

2.7%

Inflation estimates over the long term rose from
2.0% in June 2020 to 2.4% in December 2022
and remined there through mid-September
2023.

Long-term inflation expectations surged from
1.6% in June 2020 to 2.8% in December 2022,
dropping to 2.6% in May 2023, but climbing
back up to 2.7% in mid-September 2023.

Sources: Michigan University’s Index of Consumer Sentiment (preliminary September 2023 reading),
OECD’s Business Confidence Index and European Commission business and consumer surveys [Thesame methodology that the European Commission uses to standardize its Economic Sentiment
Indicator (ESI) was applied to the Eurozone Consumer Confidence and Business Climate Indicator
series.]

Sources of underlying U.S. data: Blue Chip Economic Indicators; Blue Chip Financial Forecasts, Consensus Economics, IHS Markit (S&P Global Market Intelligence), Federal Reserve Bank of Cleveland, Federal Reserve Bank ofPhiladelphia (Aruoba Term Structure of Inflation Expectations, Livingston Survey, and Survey of Professional Forecasters), Oxford Economics and the University of Michigan’s Surveys of Consumers Inflation Expectations.

U.S. vs. Eurozone Unemployment Rate

Real GDP Growth (%) Estimates (Median)

Data as of September 18, 2023

Sources of underlying German data: Consensus Economics, Economist Intelligence Unit, IHS Markit (S&P Global Market Intelligence), International Monetary Fund, Oxford Economics and PwC.

Data as of September 18, 2023

March

June

U.S.

World

2020

4.4%
11.0%

7.2%

2021

2021

5.9

6.0

2022

8.1%

3.1

2020

September

7.9%

8.6%

December

6.7%

8.2%

March

6.0%

8.2%

June

5.9%

7.9%

Canada2023

2024

2.6 2.42021

5.020222023

2.1 2.0

2020

-2.8

-3.2

2024

1.02022

3.4

2020

2023

2024

1.3 1.2

-5.1

2021

4.7%

7.3%

3.9%

7.0%

March

3.6%

6.8%

June

3.6%

6.7%

September

3.5%

6.7%

December

3.5%

6.7%

September

DecemberUK

Eurozone
2021

7.6

2021

5.4

2022

2022

4.1

3.4

2023

2020

2024

0.6 0.9

-6.2

2023

2020

2024

0.3 0.6

-11.0

2022

Brazil

China

2023
March

3.5%

2021

2021

9.1

8.4

6.5%
2021

June

Latest Available*

3.6%

6.4%

3.8%

6.4%

Source: U.S. Bureau of Labor Statistics and Eurostat* Data through August 2023 for the U.S. and July 2023 for the Eurozone.

India

5.02023
2022

3.0

2020

-3.6

2023

2.5

2024

1.5

2020

2.22022

2022

7.2

2024

5.1 4.6

2023

2024

6.3 6.2

3.0

2020

-5.8

Sources: OECD, International Monetary Fund, World Bank, Blue Chip Economic Indicators, Consensus Economics, Economic Intelligence Unit, Fitch Ratings, IHS Markit (S&P Global Market Intelligence), Moody's Analytics,
Oxford Economics and S&P Global Ratings. Some sources did not have data available for all countries and regions.

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