Cost of Capital in the Current Environment
Update – October 2022

“Major central banks continue to raise interest rates to tame stubbornly-high inflation, which has reached levels not seen in 30 to 40 years in some countries,
with Germany reaching a 70-year record high. Economists have severely downgraded real growth expectations for 2022 and 2023, with several countries
expected to experience a recessionary period. Global financial markets are trying to ascertain if central banks will manage a soft landing while trying to getinflation under control. Amidst this highly uncertain environment, cost of capital inputs have risen relative to the beginning of 2022 and are approaching theheight of the pandemic.
Carla S. Nunes, CFA – Managing Director, Kroll

Kroll Cost of Capital Inputs

Total Assets Held by Major Central Banks Over Time

Data as of October 24, 2022

Normalized
Risk-Free Rate”

Data as of October 24, 2022

Kroll Recommended
Equity Risk Premium% Change
After COVID-19

Feb 2020 – October 2022

U.S.

(in USD)Higher of
3.5% or
Spot*

6.0%

(in EUR)

Bank of Japan
European Central Bank

5.5%

Higher of
3.0% orSpot**Eurozone ***63%-15%
68%
110%

Bank of England

U.S. Federal Reserve

USD 23.0 Trillion
COVID-19

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 proxyfor 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 October 24, 2022

80.9

Max during
COVID-19 crisis

82.7

Since Wuhan Lockdown*

87.5
85.6

20.2

Current
levelEurozone

28.7

Data as of October 24, 2022

6.7%

7.7%

3.8%

Current
level

4.25%

3.61%

12.17%

TOPIX

5.2%

3.2%

9.1%

JapanCAC 40

2.7%

FranceMSCI All Country World Index

EurozoneGermanyNetherlands

-3.4%

2.42%

2.33%

2.64%

-4.3%

FranceSpain

Italy

2.87%

3.43%

4.54%

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

STOXX® Europe 600
Eurozone

FTSE 100UK

CSI 300

-9.3%

China

IBEX 35-19.3%Spain

UK

Switzerland

Sweden

3.74%

1.31%

2.26%

-5.0%

FTSE 100

-5.3%

TOPIX

-11.9%IBEX 35

UKJapanSpain

CAC 40-14.3%

France-17.6%

STOXX® Europe 600
Eurozone

DAX-18.6%
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.

DAX

Germany

-6.6%

4.5%

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

World

Year-to-Date 2022
Europe – Other

18.8%

14.9%

Long-term
average

BrazilEuro-DenominatedCorporate Credit Spreads

U.S. Corporate CreditSpreads

14.2%

U.S.

Canada-0.2%

Global Credit Spreads

Max during
COVID-19 crisis

S&P 500

U.S.

23.8

29.9

Max during
2008 Global
Financial Crisis

Data as of October 24, 2022

VSTOXX® (Europe)

Max during
2008 Global
Financial Crisis

Long-term
average

Data as of October 24, 2022

Americas

VIX Index (U.S.)

Stock Market Performance

ChinaIndiaJapan

2.72%

7.51%

0.26%

Germany

S&P 500-20.3%U.S.

MSCI All Country World Index-23.9%World

CSI 300-26.5%
Sources: Bloomberg (Brazil, India), European Central Bank (Eurozone aggregate yield) and
Capital IQ (other countries)

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 October 2022

Data as of October 2022

Pre-COVID-19(February 2020)

Consumer
Sentiment

Business
Confidence

Post-COVID-19(October 2022)

101.0

59.8

107.4

64.2

99.0
100.6

*Long-Term Avg.
(1952–2022)

86.0(1985–2022)

100.0(1950–2022)

100.9** 100.0(1985–2022)

108.1* 100.0

U.S.

Germany

2.9%

2.8%Inflation estimates over the long-term rosefrom 2.0% in June 2020 to 2.9% in October
2022.

Long-term inflation expectations have surged
from 1.6% in June 2020 to 2.8% in October2022.

* Data as of September 2022** Data as of August 2022
Sources: Michigan University’s Index of Consumer Sentiment (updated through October 2022),
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, 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 Inflation Expectations.

U.S. vs. Eurozone Unemployment Rate

Real GDP Growth (%) Estimates (Median)

Data as of October 2022

Sources of underlying German data: Consensus Economics, Economist Intelligence Unit, IHS Markit, International Monetary Fund, Oxford Economics and PwC. Excludes inflation forecasts for 2022, as theindications were deemed an outlier and unduly influencing the long-term average.

Data as of October 17, 2022

WORLD2020
March
June
September
December

U.S.

2021

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%

2021

2021

5.9

5.9
2022

2.92020EUROZONE

2023

2.0

1.6 2023
0.2

2020

2022

3.0

2022

-2.8

-3.3

5.2
2020

2023

-6.3

0.0

2021
March
June
September
December

CHINA

INDIA
2021

2021

8.7

8.1
2022

2022
March

3.6%

6.8%

June

3.6%

6.8%

Latest available*

3.5%

6.6%

2.2

3.2

4.7

2020

-6.6

2021

2022

7.1

2023
2020

UK

7.5

2023

5.7

2022

4.1

2020

-11.0

2023

-0.5

Source: U.S. Bureau of Labor Statistics and Eurostat* Data through September 2022 for the U.S. and August 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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