Cost of Capital in the Current Environment
Update – January 2023

“Although at a slower pace, major central banks are continuing to raise interest rates to tame high inﬂation, which reached levels not seen in 30 to 40 years in somecountries (70-year record high for Germany). Inﬂation appears to have peaked at the tail end of 2022, which led ﬁnancial markets to hope that interest rate hikes will
be stopping sometime in 2023. Economists have severely downgraded real growth expectations for 2023 relative to a year ago, with several countries expected tofall into recession. However, global financial markets are generally pricing a soft landing rather than a deep and prolonged recessionary period, particularly sincenatural gas prices have stabilized and China has ended its zero-Covid-19 policy. Amidst this highly uncertain environment, cost of capital estimates increased
during 2022 but could stabilize or even improve in 2023, if central banks are perceived to have inﬂation under control.

”

Carla S. Nunes, CFA – Managing Director, Kroll

Kroll Cost of Capital Inputs

Total Assets Held by Major Central Banks Over Time

Data as of January 17, 2023

Normalized
Risk-Free RateU.S.

(in USD)

After COVID-19

Feb 2020 – January 2023

76%0%
69%
105%

Bank of England

6.0%

Bank of Japan
European Central Bank
U.S. Federal Reserve

5.5%

Higher of
3.0% orSpot**(in EUR)% Change

Kroll-Recommended
Equity Risk Premium

Higher of
3.5% or
Spot*

Eurozone ***Data as of January 17, 2023

COVID-19 Begins

to6.0%

2008 Global Financial Crisis*

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 15, 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.

*** 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

Global 10-Year Government Bond Yields

Data as of January 17, 2023

Since Wuhan Lockdown*

Max during
2008 global
ﬁnancial crisis

80.9

87.5

Max during
COVID-19 crisis

82.7

85.6

Long-term
average

20.2

Current
level

19.4

Eurozone

Data as of January 17, 2023

6.7%

7.7%

3.8%

Current
level

3.53%

2.85%

12.51%CAC 40

5.1%

2.8%

18.5%

FranceDAX

13.4%

Germany

MSCI All Country World Index

10.8%

TOPIX

EurozoneGermany

Netherlands

10.0%

2.19%

2.09%

2.40%

Japan

STOXX® Europe 600

Spain

Italy

2.52%

3.07%

3.85%

CSI 300

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

3.3%

China

IBEX 35
Spain

Since the Beginning of 2022
FTSE 100

6.3%

UKUK

Switzerland

Sweden

3.35%

1.13%

1.84%

IBEX 35

2.0%

Spain

CAC 40-1.1%

France-4.4%

DAX

-4.5%

TOPIX

GermanyJapan

-6.4%
Asia

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 Barclays PanEuropean High Yield Index (EUR) and the Bloomberg Barclays Euro Aggregate Corporate BondIndex. Long-term averages are based on 1995 to present for VIX daily series, 1999 to present for
VSTOXX daily series, 1996 to present for U.S. credit spread daily series, and 1998 to present for
EUR-denominated credit spread monthly series.

4.6%

UKFrance

3.5%

Sources: Capital IQ, FRED® Economic Data, Morningstar Direct

8.7%

Eurozone

FTSE 100-6.6%

Europe – Other

18.8%

14.9%

Long-termaverage

BrazilEuro-DenominatedCorporate Credit Spreads

U.S. CorporateCredit Spreads

20.0%

U.S.

CanadaWorld

Global Credit Spreads

Max during
COVID-19 crisis

S&P 500

U.S.

23.8
18.6

Max during
2008 global
ﬁnancial crisis

Data as of January 17, 2023

VSTOXX® (Europe)

Americas

VIX Index (U.S.)

Stock Market Performance

Data as of January 17, 2023

ChinaIndia

Japan

2.85%

7.33%

0.51%

STOXX® Europe 600
EurozoneMSCI All Country World Index-15.5%

Sources: Reﬁnitiv (Brazil, India), European Central Bank (Eurozone aggregate yield) and
Capital IQ (other countries)World-16.3%

S&P 500-16.3%CSI 300

U.S.

China

Source: Capital IQ*The ﬁrst lockdown due to COVID-19 began on January 23, 2020, in Wuhan, China.

Long-Term Inﬂation Expectations (Median)
Data as of January 1, 2023

Data as of January 17, 2023

Pre-COVID-19(February 2020)

Consumer
Sentiment

BusinessConﬁdence

Post-COVID-19(January 2023)

Long-Term Avg.
(1952–2023)

85.8

101.0

64.6

107.1

77.5*

99.0

99.0

100.6

105.4

(1985–2023)

100.0

*

*

(1950–2023)

100.0(1985–2023)

100.0* Data only available for December 2022
Sources: Michigan University’s Index of Consumer Sentiment, OECD’s Business Conﬁdence Indexand European Commission business and consumer surveys [The same methodology that theEuropean Commission uses to standardize its Economic Sentiment Indicator (ESI) was applied to theEurozone Consumer Conﬁdence and Business Climate Indicator series.]

U.S. vs. Eurozone Unemployment Rate
Data as of January 17, 2023

U.S.

Germany

2.4%

2.8%

Inﬂation estimates over the long term rosefrom 2.0% in June 2020 to 2.9% in October
2022, but declined to 2.4% at the end ofDecember 2022.

Long-term inﬂation expectations surged from1.6% in June 2020 to 2.8% in October 2022
and stayed at that level at the end ofDecember 2022.

Sources of underlying U.S. data: Blue Chip Economic Indicators; Blue Chip Financial Forecasts, Consensus Economics, IHS Markit, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Philadelphia (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.
Sources of underlying German data: Consensus Economics, Economist Intelligence Unit, IHS Markit, International Monetary Fund, Oxford Economics and PwC.

Real GDP Growth (%) Estimates (Median)
Data as of January 17, 2023

World2020
March
June
September
December

4.4%
11.0%
7.9%
6.7%

7.1%
8.0%
8.7%
8.1%

6.0%
5.9%
4.7%
3.9%

8.1%
7.8%
7.4%
7.0%

U.S.

2021

Eurozone

2021

2021

5.9

6.0
2022

3.0

2020

2023

1.7

5.3

2024

2.7

2022

-2.8

-3.2

3.3

2024

1.9 2023 1.4
0.5

2020

2022

2020

2024
2023

-6.3

0.0

1.5

2021
March
June
September
December

3.6%

6.8%

June

3.6%

6.7%

September

3.5%

6.6%

Latest available*

3.5%

6.5%

India
8.7

8.120202.2

UK

2021

2021

2023

2022
March

China

2022

3.0

6.9

2024

4.6 4.8

2020

-6.6

2021

2022

2024
2023

5.7

7.5

6.6

2022

4.3

2020

-11.0

2023

-1.0

2024

0.8

Source: U.S. Bureau of Labor Statistics and Eurostat* Data through December 2022 for the U.S. and November 2022 for the Eurozone.

Sources: OECD, International Monetary Fund, World Bank, Blue Chip Economic Indicators, Consensus Economics, Economic Intelligence Unit, Fitch Ratings, IHS Markit, Moody's Analytics, Oxford Economics andS&P Global Ratings

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