Coronavirus:
Cost of Capital Considerations in
the Current Environment
Duff & Phelps Presenters
Carla S. Nunes
Managing Director

James P. Harrington
Director

April 16, 2020

DUFF & PHELPS
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ENHANCING VALUE Across a Range of Expertise

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April 16, 20204

Disclaimer
Any positions presented in this session are those of the panelists and do not
represent the official position of Duff & Phelps, LLC. This material is offered for
educational purposes with the understanding that neither the authors nor Duff &Phelps, LLC or its affiliates are engaged in rendering legal, accounting or any otherprofessional service through presentation of this material.
The information presented in this session has been obtained with the greatest of carefrom sources believed to be reliable, but is not guaranteed to be complete, accurate
or timely. The authors and Duff & Phelps, LLC or its affiliates expressly disclaim any
liability, including incidental or consequential damages, arising from the use of thismaterial or any errors or omissions that may be contained in it.

Duff & Phelps

April 16, 20205

Carla S. Nunes, CFA – Managing Director – Valuation Digital Solutions• Carla Nunes is a Managing Director in the in the Office ofProfessional Practice, where she provides firm-wide technicalguidance on a variety of valuation, financial reporting and tax
issues. As part of that role, she also co-authors Duff & Phelps’
annual U.S. and European Goodwill Impairment Studies.
• She is also the Global Leader of Duff & Phelps’s Valuation Digital
Solutions group, which produces cost of capital thought leadershipcontent and data housed in the Cost of Capital Navigator.

Contact:
carla.nunes@duffandphelps.com• In 2011, Carla completed a one-year rotation in Duff & Phelps'
London office, where she promoted the firm's IFRS education
efforts and marketing initiatives, as well dealing with IFRS
implementation issues.
• Prior to this role, Carla was part of the Valuation Advisory Services
business unit, performing engagements primarily for financial
reporting and tax purposes at Duff & Phelps and its predecessor
firms, PricewaterhouseCoopers and Standard & Poor’s.
• Carla is a co-author of the (previously published) “Valuation
Handbook” series and is a co-creator of the Duff & Phelps Cost of
Capital Navigator.

Duff & Phelps

April 16, 2020

6

James Harrington – Director – Valuation Digital Solutions• Jim is a leading contributor to Duff & Phelps’ efforts in thedevelopment of studies, surveys, online content and tools, firmwide valuation models, data distribution platforms, andpublished thought leadership.
• Previously, Jim was director of valuation research in
Morningstar's Financial Communications Business.
• James is a co-author of the (previously published) “Valuation
Handbook” series and is a co-creator of the Duff & Phelps Costof Capital Navigator.
Contact:
james.harrington@duffandphelps.com

Duff & Phelps

April 16, 20207

Today’s Presentation

1. Coronavirus Timeline
2. Valuation Framework
3. Projected Growth
4. Financial Market Performance
5. Risk-free Rate Analysis
6. Equity Risk Premium
7. Country Risk
8. Other Cost of Capital Inputs

Duff & Phelps

April 16, 20208

Coronavirus
Timeline

Duff & Phelps

16 July 20199

COVID-19 Brief Timeline

Valuation Framework:
Back to the Basics

Duff & Phelps

16 July 201911

Value of a Business – Using a Discounted Cash Flow (DCF) Method
3 Key Value Drivers

Current
Cash Flowsof the Firm

Enterprise
Value
Projected
growth (g)of CashFlows

Duff & Phelps

RiskAdjusted
Discount
Rate

April 15, 2020

12

Value of a Business – Using a DCF Method
In Good Times: Economic Expansion
Growth rate (g) is positive

FCF0 * (1+ g1)

FCF1 * (1+ g2)… n periods(1+WACC) ^ 1(1+WACC) ^ 2(1+WACC) ^ n

Terminal Value =FCFn * (1 + g LT)

Enterprise
Value(WACC - gLT) ^ n

Discount Rate is lower
WACC = Weighted Average Cost of Capital

Value ishigherProjected future cash flows are discounted to present value using a discount rate

Definitions:gLT = Long-term Growth Rate
FCF = Free Cash Flows
Duff & Phelps

April 15, 202013

Value of a Business – Using a DCF Method
In Bad Times: Economic Recession
Growth rate (g) is low or negative

2020

2021

FCF0 * (1 + g1)

FCF1 * (1 + g2)… n periods(1+ WACC) ^ 1(1+ WACC) ^ 2(1+ WACC) ^ n

Terminal Value =FCFn * (1 + g LT)

Enterprise
Value(WACC – g LT) ^ n

Discount Rate is higher
WACC = Weighted Average Cost of Capital

Value islower

Projected future cash flows are discounted to present value using a discount rate

Definitions:gLT = Long-term Growth Rate
FCF = Free Cash Flows
Duff & Phelps

April 15, 202014

Projected Growth:
Economy & Earnings

Duff & Phelps

16 July 201915

Where We Stand: the Status of the Global Economy“

Just three months ago, we expected positive per capita
income growth in over 160 of our member countries in
2020. Today, that number has been turned on its head:
we now project that over 170 countries will experience
negative per capita income growth this year.

”– “Confronting the Crisis: Priorities for the Global Economy”, speech
by Kristalina Georgieva, IMF Managing Director on April 9, 2020

Duff & Phelps

April 16, 202016

Real GDP Growth – Sources of Estimates

We reviewed multiple sources of Real GDP Growth forecasts:
1. International Monetary Fund (IMF)
2. Organisation for Economic Co-operation and Development (OECD)
3. Blue Chips Economic Indicators
4. Consensus Economics
5. Economist Intelligence Unit (EIU)
6. Fitch Ratings
7. IHS Markit
8. Moody’s Analytics
9. Oxford Economics
10. Standard & Poor’s

Duff & Phelps

April 16, 202017

Real GDP growth (%) estimates by region: World
Data as of April 14, 2020
Before COVID-19

After COVID-19
2021

4.3

WORLD

2021
2020

2.6

Change in Growth

2.8
2020

-2.1

Relative % Change

2020 Median

2021 Median
Duff & Phelps

April 16, 202018

Real GDP growth (%) estimates by region: United States

UNITED STATES

Data as of April 14, 2020
Before COVID-19

Change in Growth

After COVID-19
2021

3.8
2020

2021

1.9 1.9
2020-3.1

Relative % Change

2020 Median

2021 Median
Duff & Phelps

April 16, 202019

Real GDP growth (%) estimates by region: Eurozone
Data as of April 14, 2020

Before COVID-19

After COVID-19

EUROZONE

2021

Change in Growth

3.0
2020

2021

1.1 1.2

2020

-4.8

Relative % Change

2020 Median

2021 Median
Duff & Phelps

April 16, 202020

Real GDP growth (%) estimates by region: China
Data as of March 31, 2020

Before COVID-19

After COVID-19
2021

8.1

CHINA

2020

Change in Growth2021

5.8 5.7
2020

1.4

Relative % Change

2020 Median

2021 Median
Duff & Phelps

April 16, 202021

Fiscal Policy Response to COVID-19 for G-20 Countries as % of GDP
IMF Analysis as of April 8, 2020
Emergency lifelines
So far, countries around the world have used about $8 trillion to fight the pandemic, with G20 countries
taking the led. (Announced fiscal measures in G20 economies, % of GDP)35

5.0
Revenue and expenditure measures

30

4.5
4.0

Below-the-line measures (loan and equity injection) and guarantees

25

Close to 35% of GDP

3.5
3.0 Close to 25% of GDP

20

2.5
15

2.0

10

1.5
1.0

G20 (rhs)

Germany

Italy

Japan

United Kingdom

FranceAustralia

United States

Spain

Canada

Korea

BrazilIndonesia

China

Argentina

TurkeyRussiaSaudi Arabia

MexicoIndia

0South Africa

5

0.5
0.0

Sources: National authorities; and IMF staff estimates as of April 8, 2020.
Note: G20 = Group of twenty. G20 aggregates are calculated using PPP-adjusted GDP weights

Source: https://blogs.imf.org/2020/04/15/fiscal-policies-to-contain-the-damage-from-covid-19/?utm_medium=email&utm_source=govdelivery#post/0
Duff & Phelps

April 16, 2020

22

U.S. Real GDP (Annualized) Growth Estimates for 2020
Before & After Enactment of the U.S. Fiscal Stimulus Package (CARES Act)
Moody’s Analytics’ Analysis as of March 31, 2020

Projected Real GDP Growth
PeriodPrior to CARES Act(%)

After CARES Act(%)

Net Impact of 2020
CARES Act (%)

Q2 2020-29.60-18.33+11.27Q3 2020

8.66

10.95

+2.29

Q4 2020

6.69

2.38

-4.31

Q1 2021

8.94

2.60

-6.34

Full Year 2020

-4.83

-2.17

+2.65

Full Year 2021

4.91

2.68

-2.23

Source: Moody’s Analytics
Duff & Phelps

April 16, 2020

23

S&P 500 Earnings Consensus Estimates – Before and After Coronavirus
Analysis as of April 9, 2020

Forecast Date

31 December 2019

9 April 2020

Difference

S&P 500 Index

9.2%

-8.5%

-17.7%

Energy

21.2

-88.5

-109.7

Financials

37.0

-21.0

-58.0

Industrials

14.9

-20.0

-34.9

Consumer Discretionary

11.9

-16.6

-28.5

Materials

13.0

-9.4

-22.4

Communication Services

11.5

1.5

-10.0

Real Estate

6.6

1.4

-5.2

Consumer Staples

5.7

2.5

-3.2

Utilities

5.7

3.0

-2.7

Healthcare

8.7

3.6

-5.1

Information Technology

9.0

5.2

-3.8

Source: FactSet
Duff & Phelps

April 16, 2020

24

STOXX Europe 600 Earnings Consensus Estimates – Post-Coronavirus
Analysis as of April 14, 2020

Forecast DateSTOXX Europe 600

9 April 2020
-13.2%

Energy-49.7

Consumer Discretionary (Cyclicals)-21.9

Industrials-20.4

Financials-14.7

Basic Materials-11.4

Technology-3.8

Consumer Staples (Non-Cyclicals)-2.6

Healthcare

3.0

Telecommunications Services

4.2

Utilities

10.1

Source: Refinitiv I/B/E/S

Duff & Phelps

April 16, 2020

25

S&P Global Ratings
Rating Actions due to COVID-19 and Oil Price Collapse
Percent (%) of Global Issuers Affected by Industry and Region as of April 10, 2020
Top 6 - Global Impacted Industries
Automotive (68)76.4Media and entertainment (88)62.4

Retailing (105)55.9Transportation (62)53.0Energy (125)49.2

Hotels and gaming (60)48.0

Capital goods (79)40.3

Consumer products (75)32.6

Building materials (27)31.0

Financial institutions (62)29.4Real estate (48)29.3

Chemicals (35)25.5Transportation infra (16)24.6

Health care (39)21.0

Aerospace and defense (12)18.8

Banks (75)18.8

Business and consumer services (30)15.0Commercial and professional services (19)14.0Technology (36)12.4

Metals and mining (15)

11.9

Sovereigns (19)10.2

Homebuilders and developers (9)9.9Insurance (20)Telecom (11)Utilities (17)

7.8

700

63%

600
500
400
27%

300
200

18%

19%

Asia Pacific

Europe, Middle
East & Africa

1000Latin America

North America

7.6
5.0

% of Issuers Affected# of Issuers Impacted* Source: S&P Global Ratings, “COVID-19: Coronavirus- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date”, April 13, 2020.

Duff & Phelps

April 16, 202026

Financial Market
Performance

Duff & Phelps

16 July 201927

MSCI Developed, Emerging, and Frontier Markets

Most Impacted: RED bold.

As of March 31, 2010 Year-to-date (YTD) (in USD)

Least Impacted: BLUE Bold

BLUE Bold

Developed Markets
Australia
Austria
Belgium
CanadaDenmark
FinlandFranceGermany
Hong Kong
IrelandIsraelItaly
Japan
Netherlands
New Zealand
NorwayPortugal
Singapore
Spain
SwedenSwitzerland
United Kingdom
United States

Emerging Markets-33.2%-42.9%-32.5%-27.4%-7.7%-18.9%-27.5%-27.0%-17.3%-25.5%-18.0%-29.2%-16.6%-20.6%-16.3%-33.3%-13.1%-28.2%-29.7%-21.4%-11.1%-28.8%-19.6%

Average -23.7%
Median -25.5%
Duff & Phelps

Argentina
BrazilChile
China
Colombia
Czech Republic
Egypt
GreeceHungary
India
Indonesia
Korea
Malaysia
MexicoPakistan
Peru
Philippines
PolandQatar
RussiaSaudi Arabia
South Africa
TaiwanThailandTurkeyUnited Arab Emirates

Frontier Markets-39.3%-50.2%-33.4%-10.2%-49.7%-38.5%-27.1%-45.1%-39.0%-31.1%-39.4%-22.4%-19.2%-35.4%-39.6%-35.8%-32.0%-36.5%-17.3%-36.3%-23.1%-40.3%-19.0%-33.7%-30.0%-27.1%

Average -34.6%
Median -35.8%

Bahrain
Bangladesh
Croatia
Estonia
JordanKazakhstan
Kenya
KuwaitLebanonLithuania
Mauritius
MoroccoNigeria
Oman
Romania
SerbiaSlovenia
Sri Lanka
Tunisia
Vietnam-22.2%-17.9%-18.5%-31.1%-9.9%-23.6%-24.8%-26.8%
0.1%-22.9%-37.9%-26.0%-33.0%-11.1%-30.8%-27.5%-22.7%-34.5%-6.4%-31.0%

Average -22.9%
Median -24.2%
April 16, 202028

Equity Markets Around the World
Through April 15, 2020

Country

Index

High
in 2020

Date

Low
2020

Date

Declinefrom2020 HighUSA

S&P 500

3,386.15

19-Feb-20

2,237.40

23-Mar-20-33.9%

2,783.36

24.4%-13.8%USA

Dow Jones Industrial Average

29,551.42

12-Feb-20

18,591.93

23-Mar-20-37.1%

23,504.35

26.4%-17.6%USA

NASDAQ Composite

9,817.18

19-Feb-20

6,860.67

23-Mar-20-30.1%

8,393.18

22.3%

-6.5%

CanadaS&P/TSX Composite index

17,944.10

20-Feb-20

11,228.50

23-Mar-20-37.4%

13,958.60

24.3%-18.2%

Mexico

IPC MEXICO

45,902.68

20-Jan-20

32,964.22

23-Mar-20-28.2%

33,855.24

2.7%-22.2%

EuropeSTOXX 600

433.9019-Feb-20

279.6618-Mar-20-35.5%

323.06

15.5%-22.3%

UK

FTSE 100

7,674.60

17-Jan-20

4,993.90

23-Mar-20-34.9%

5,597.88

12.1%-25.8%

Germany

DAX

13,789.00

19-Feb-20

8,441.71

18-Mar-20-38.8%

10,279.76

21.8%-22.4%

RussiaMOEX Russia Index

3,219.92

20-Jan-20

2,112.64

18-Mar-20-34.4%

2,498.94

18.3%-18.0%India

S&P BSE SENSEX

41,952.63

14-Jan-20

25,981.24

23-Mar-20-38.1%

30,379.81

16.9%-26.4%

Hong Kong HANG SENG INDEX

29,056.42

17-Jan-20

21,696.13

23-Mar-20-25.3%

24,145.34

11.3%-14.3%

Shanghai

SSE Composite Index

3,115.57

13-Jan-20

2,660.17

23-Mar-20-14.6%

2,811.17

5.7%

-7.8%

Japan

TOPIX

1,744.16

20-Jan-20

1,236.34

16-Mar-20-29.1%

1,434.07

16.0%-16.7%

Australia

All Ordinaries

7,255.20

20-Feb-20

4,564.10

23-Mar-20-37.1%

5,455.50

19.5%-19.8%

Duff & Phelps

April 15, 2020

Increasefrom2020 Low

2020
YTD

April 16, 2020

29

S&P 500 Index
October 1, 2019 ‒ April 15, 2020

Duff & Phelps

April 16, 202030

Is the U.S. Now in a Bull Market?

Duff & Phelps

April 16, 202031

U.S. Market Crashes, Using S&P 500 Price Index as the Benchmark

1929 Crash
Start Date of the Decline
S&P 500
End date of the Decline

1987 Crash
16-Sep-29
31.86
1-Jun-32

Start Date of the Decline
S&P 500
End date of the Decline

Dotcom Crash
25-Aug-87
336.77
19-Oct-87

Start Date of the Decline

24-Mar-00

S&P 500

1,527.46

End date of the Decline

9-Oct-02

S&P 500

4.40

S&P 500

224.84

S&P 500

776.76

Decline-86.2%

Decline-33.2%

Decline-49.1%

Recovery Date

22-Sep-54

Recovery Date

S&P 500

32.00

S&P 500

Years to Recover

25.02

Years to Recover2008 Crash

26-Jul-89
338.05
1.92

9-Oct-07

Start Date of the Decline

S&P 500

1,565.15

S&P 500

3,386.15

End date of the Decline

9-Mar-09

End date of the Decline

23-Mar-20

S&P 500

1,530.23

Years to Recover

7.18

19-Feb-20

S&P 500

676.53

S&P 500

2,237.40

Decline-56.8%

Decline-33.9%

Recovery Date

28-Mar-13

Recovery Date?

S&P 500

1,569.19

S&P 500?

Years to Recover?

Duff & Phelps

30-May-07

Covid-19 Crash

Start Date of the Decline

Years to Recover

Recovery Date

5.47

April 16, 202032

U.S. Market Crashes, Using S&P 500 Price Index as the Benchmark
Length of Decline and Average Years to Recover
Length of Decline and Average Years to Recover
Decline> -80% and <= -90%
> -70% and <= -80%
> -60% and <= -70%
> -50% and <= -60%
> -40% and <= -50%
> -30% and <= -40%
> -20% and <= -30%
> -10% and <= -20%
> 0% and <= -10%

0 to 6 months
0.71
0.78
1.13
0.89
0.56
0.17

7 to 12 months

13 to 18 months

19 to 24 months

25 to 30 months

31 to 36 months

4.70
4.03
2.75
3.22
1.69
1.50
1.04
0.79

5.48
4.66
4.90
4.14
2.48
1.67
1.56
1.35

21.19
15.54
5.48
7.01
2.62
2.11
2.12
1.72

21.72
21.04
5.38
5.62
3.33
2.22
2.37
2.32

24.47
19.73
4.67
3.86
3.76
2.80
2.76

7 to 12 months
9
76
91
109
99
346
1,068
604

13 to 18 months
110
15
103
118
59
293
725
572

19 to 24 months
10
115
127
123
30
202
461
399

25 to 30 months
93
32
102
182
90
10
280
195

31 to 36 months
107
17
213
168
52
31
171

2,402

1,995

1,467

984

759

CountsDecline> -80% and <= -90%
> -70% and <= -80%
> -60% and <= -70%
> -50% and <= -60%
> -40% and <= -50%
> -30% and <= -40%
> -20% and <= -30%
> -10% and <= -20%
> 0% and <= -10%
Total

0 to 6 months
12
87
112
370
889
6,076
7,546

Analysis performed over the time horizon December 31, 1927 through April 14, 2020 (daily).
Duff & Phelps

April 16, 202033

Brent Crude Oil Prices (U.S. Dollars per barrel)
October 31, 2007 – April 14, 2020
December 19, 2019
66.54
(D&P decreases ERP to
5.0% from 5.5%)

160.0

140.0

120.0
April 12, 2020
31.74
OPEC andRussia reachsupply reduction
agreement

100.0

80.0

60.0

40.0

20.0

December 31, 2008
45.59

January 18, 2016
28.55
(Oil reaches lowest
level in 12 years)

March 9, 2020
34.36
Russia and Saudi Arabia
fail to reach agreement andbegin price war

March 31,
2020
22.74
Oil prices hit
lowest point in
18 years

0.0

Source: Bloomberg
Duff & Phelps

April 16, 202034

Gold Prices (U.S. Dollars per troy ounce)
December 31, 2019 – April 14, 2020

$2,000$1,800$1,600$1,400$1,200$1,000$800

Source: S&P Capital IQ.
Duff & Phelps

April 16, 2020

35

Risk-free Rate
Analysis

Duff & Phelps

16 July 201936

10-year Yields for U.S., Germany, U.K., Japan
December 31, 2007 – April 9, 2020
6%
United States Treasury Constant Maturity - 10 YearGermany Government Debt - 10 Year

5%

United Kingdom Government Debt - 10 Year
Japan Government Debt - 10 Year
4%

3%

2%

1%

0.73%
0.32%
0.01%

0%

Source: S&P Capital IQ-0.35%-1%-2%

Duff & Phelps

April 16, 202037

Federal Reserve (Fed) – A Selection of Monetary Policy Measures
As of April 10, 2020
Date

AmountUp To

Highlighted Actions & Announcements

3-Mar-20

Policy Rate (Target Fed Funds Rate) cut by 50 b.p. to a target range of 1% to 1.25%

15-Mar-20

Policy Rate (Target Fed Funds Rate) cut by 100 b.p. to a target range of 0% to 0.25%

15-Mar-20 $700 billion • New program: $500 billion in U.S. Treasuries and $200 billion in Mortgage-Backed Securities (MBS)• Establishment of U.S. dollar liquidity swap line with other major central banks

17-Mar-20 $1.0 trillion • Commercial Paper Funding Facility (CPFF) created• Primary Dealer Credit Facility (PDCF) created

18-Mar-20• Money Market Mutual Fund Liquidity Facility (MMLF) created

19-Mar-20• Establishment of U.S. dollar liquidity swap line with additional central banks

23-Mar-20 As needed • Purchase of U.S. Treasuries and Agency bonds in "amounts needed“• Three new facilities: Up to $600 million
1. Primary Market Corporate Credit Facility (PMCCF): support credit to large employers for new bonds andloans; and2. Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds
3. Term Asset-Backed Securities Loan Facility (TALF): enable issuance of asset-backed securities (ABS) by
student, car and credit-card loans, and loans guaranteed through Small Business Administration• Expand scope of CPFF and MMLF

9-Apr-20

Duff & Phelps$2.3 trillion New $2.3 trillion loan program to support the economy:••••

Paycheck Protection Program Liquidity Facility to extend credit to PPP financial institutions
Main Street Lending Program: Up to $600 billion
Expand size and scope of PMCCF, SMCCF, and TALF: Up to $850 billion
Municipal Liquidity Facility: Up to $500 billion

April 16, 202038

Federal Reserve Balance Sheet
January 1, 2007 – April 8, 2020
$7,0004,000$5.997 Trillion

3,500

3,000

Mortgages$5,0002,500$4,0002,000$3,000Index

Fed Balance Sheet (in $billions)$6,0001,500$2,000Treasuries

1,000$1,000500$00Traditional Security Holdings

Long Term Treasury Purchases

Lending to Financial Institutions

Liquidity to Key Credit Markets

Fed Agency Debt MBS Securities Purchases

S&P 500

Source: Federal Reserve Bank of Cleveland
Duff & Phelps

April 16, 202039

Federal Reserve Balance Sheet

Let’s take a closer look!

January 1, 2007 – April 8, 2020
$7,0004,000$5.997 Trillion

3,500

3,000

Mortgages$5,0002,500$4,0002,000$3,000Index

Fed Balance Sheet (in $billions)$6,0001,500$2,000Treasuries

1,000$1,000500$00Traditional Security Holdings

Long Term Treasury Purchases

Lending to Financial Institutions

Liquidity to Key Credit Markets

Fed Agency Debt MBS Securities Purchases

S&P 500

Source: Federal Reserve Bank of Cleveland
Duff & Phelps

April 16, 202040

Federal Reserve Balance Sheet (a closer look)
January 2, 2019 – April 8, 2020
$7,000

4,000

3,000

Mortgages$5,0002,500$4,0002,000$3,000
1,500

Index

Fed Balance Sheet (in $billions)

3,500$5.997 Trillion$6,000$2,0001,000

Treasuries$1,000500$00Traditional Security Holdings

Long Term Treasury Purchases

Lending to Financial Institutions

Liquidity to Key Credit Markets

Fed Agency Debt MBS Securities Purchases

S&P 500

Source: Federal Reserve Bank of Cleveland
Duff & Phelps

April 16, 202041

European Central Bank (ECB) – Summary of Actions
As of April 10, 2020

Date

AmountUp To

Highlighted Actions & Announcements

12-Mar-20 €120 billion • Expanded existing asset purchase program (APP) by €120 billion ($130 billion)• Additional auctions and more favorable terms on existing targeted longer-term refinancing operations(TLTRO-III) between June 2020 and June 2021

18-Mar-20 €750 billion • New Pandemic Emergency Purchase Program (PEPP): €750 billion ($830 billion)• Purchases conducted until the end of 2020
• Include all assets in existing the APP• Greek government bonds granted waver• Scope increase under existing corporate sector purchase program (CSPP) to include non-financial
commercial paper

20-Mar-20• Coordinated actions with other major central banks to enhance U.S. dollar liquidity

7-Apr-20• ECB adopts an unprecedented set of collateral measures to mitigate the tightening of financial conditions
across the euro area

Duff & Phelps

April 16, 202042

Combined Central Banks’ Balance Sheet: Fed, ECB, BOE, BOJ
December 1, 2006 – March 31, 2020
$18.0

USD 17.1 Trillion$16.0

Assets Held by Central Banks (in USD trillions)

$14.0

$12.0

$10.0

$8.0

$6.0

$4.0

$2.0

$0.0

U.S. Federal Reserve

European Central Bank

Bank of Japan

Bank of England

Source: Federal Reserve Bank of St. Louis Economic Research and the Bank of England.
Duff & Phelps

April 16, 2020

43

The Risk-free Rate (Rf) – Spot Rate or “Normalized” Rate?

During periods in which risk-free rates appear to be abnormally low due to flights toquality or massive monetary policy interventions (i.e. QE or quantitative easing)=> Duff & Phelps recommends normalizing the risk-free rate

Abnormally
Low Rf

Duff & Phelps

Use Normalized
Risk-free Rate

44

The Risk-free Rate (Rf) – Spot Rate or “Normalized” Rate?

Normalization can be accomplished in a number of ways, including:• Simple averaging• Various “buildup” methods

Duff & Phelps

45

U.S. 20-year Treasury Yield, including Trailing Average
December 31, 2007 – April 9, 20202008
Financial Crisis
6.0%

10-year moving average
5.0%
December 31, 2018
2.9%
(D&P increases ERP to5.5% from 5.0%)
4.0%

2.8%

3.0%

December 31, 2008
3.1%

2.0%

1.0%

September 5, 2017
2.4%
(D&P decreases ERP to
5.0% from 5.5%)
December 19, 2019
2.2%
(D&P decreases ERP
to 5.0% from 5.5%)

April 9, 2020
1.2%

0.0%

Source: 20-year U.S. government bond series. Board of Governors of the Federal Reserve System.
Duff & Phelps

April 16, 2020

46

Risk-Free Rate Normalization

Fisher Equation
Conceptually, the risk-free rate can be (loosely) illustrated as the returnon the following two components: *Risk-free
Rate

Real
Rate

Expected
Inflation* Technically, an Inflation Risk Premium should also be added, but it can be positive or negative, with some academic estimates at close to 0%
Duff & Phelps

47

Risk-Free Rate Normalization

United States
Several academic studies have suggested the long-term realrisk-free rate to be somewhere in the range of 0.0% to 2.0%
based on the study of inflation swap rates, yields on long-term
U.S. Treasury Inflation-Protected Securities (TIPS), OLG, DGSE
and other econometric models *0.0 %Long-term Real Rate

2.0%

* In academic literature, this is also sometimes called the natural rate of interest, the neutral rate, or the equilibrium rate
Duff & Phelps

48

Risk-Free Rate Normalization – Long-term Expected Inflation
Estimates as of March 23, 2020
SourceEstimate (%)

Livingston Survey(Federal Reserve Bank of Philadelphia)

2.2

Survey of Professional Forecasters

2.2

Blue Chip Financial Forecasts

2.1

Blue Chip Economic Indicators

2.2

Consensus Economics

2.2

Cleveland Federal Reserve

1.4

Arouba Term Structure of Inflation
Expectations

2.2

University of Michigan Survey 5-10 Year
Ahead Inflation Expectations

2.3

Range of Expected Inflation Forecasts

1.4% – 2.3%

Sources: "Survey of Professional Forecasters: First Quarter 2020”, Federal Reserve Bank of Philadelphia (February 14, 2020); "The Livingston Survey: December 2019”, Federal Reserve
Bank of Philadelphia (December 13, 2019); “Consensus Forecasts Global Outlook 2021–2029“, Consensus Economics Inc. (October 2019); “Consensus Forecasts – A Digest of International
Economic Forecasts”, Consensus Economics Inc. (December 2019); Blue Chip Economic Indicators (March 10, 2020), Blue Chip Financial Forecasts (December 1, 2019 and March 1, 2020);
University of Michigan Survey (March 2020), Federal Reserve Bank of Philadelphia, Arouba Term Structure (February 2020), Cleveland Federal Reserve (March 1, 2020), S&P Capital IQ™
database.

Duff & Phelps

49

Risk-Free Rate Normalization – By Buildup
U.S. Example as of March 23, 2020

0.0%
+
1.4%

2.0%
Long-term Real Rate

Long-term Inflation Forecasts

2.3%
=

=
1.4%

+

Long-term Normalized
Risk-Free Rate

4.3%

(Midpoint = 2.9%)=> 10-Year Trailing Average on 20-Year U.S. Treasury Yield = 2.8%

Concluded Normalized Rf = 3.0%
Duff & Phelps50

Equity Risk Premium

Duff & Phelps

16 July 201951

The Duff & Phelps Recommended ERP is a Two-Step Process

Step 1: What is a reasonable range of unconditional ERP that can be
expected over an entire business cycle?
“What is the range?”

Step 2: Research has shown that ERP is cyclical during the businesscycle. We use the term conditional ERP to mean the ERP that reflects
current market conditions.
“Where are we in the range?”

Duff & Phelps

52Duff & Phelps Considers Multiple Models to Estimate U.S. ERP“Historical”
ERP
Estimates

3.5%
Duff & Phelps＋

Forwardlooking
ERP
Estimates

Range of Unconditional ERP

6.0%
53

Duff & Phelps Recommended U.S. Equity Risk Premium (ERP)For discount rates developed as of:March 25, 2020 (and thereafter)

Duff & Phelps

54Summary Table of Factors

Duff & Phelps

April 15, 2020

55

Chicago Board Options Exchange (CBOE) “VIX” Index
January 2, 2008 – April 9, 2020
90.0

85.0

November 20, 2008
80.9
(Previous Record High for
VIX Index)

80.0
75.0
70.0

March 16, 2020
82.7
(New Record High for VIX Index)

September 30, 2011
43.0
(D&P increases ERP to 6.0% from
5.5%)

65.0
60.0

April 9, 2020
41.7

55.0

50.0

December 19, 2019
12.5
(D&P lowers ERP to 5.0% from
5.5%)

45.0
40.0
35.0
30.0
25.0

20.0

19.8

15.0
10.0

CBOE Volatility S&P 500 Index (^VIX)

5.0

Long-Term Average

0.0

November 3, 2017
9.1
(Record Low for VIX Index)

Source: S&P Capital IQ.
Duff & Phelps

April 16, 2020

56

Spread of U.S. High Yield Corporate Bond Yields Over U.S. Investment Grade
Corporate Bond Yields
April 9, 2008 – April 9, 2020
16.0%

December 15, 2008
14.9%
(Record High)

14.0%

12.0%

September 30, 2011
5.6%
(D&P increases ERP to 6.0% from
5.5%)

10.0%

January 31, 2016
5.6%
(D&P increases ERP to 5.5% from 5.0%)

February 11, 2016
6.5%

April 9, 2020
5.2%

8.0%

6.0%

4.0%

2.0%

Spread of U.S. High Yield Corporate Bond Yields
over U.S. Investment Grade Corporate Bond
Yields

December 19, 2019
2.4%
(D&P lowers ERP to 5.0% from 5.5%)

0.0%

Source: S&P Capital IQ.
Duff & Phelps

April 16, 2020

57

Initial Jobless Claims – Seasonally Adjusted (in Thousands)(Recessionary periods shaded in gray)
January 7, 1967 – April 4, 2020
8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

-

Source: Federal Reserve Bank of St. Louis.
Duff & Phelps

Recession

Initial Claims
April 16, 202058

Weekly Initial Jobless Claims (Seasonally Adjusted), Over Time in Thousands
January 7, 1967 – April 4, 2020

8,000

Prior to COVID-19
1982 - 2009

COVID-19
2020
6,867
6,867

7,000

6,606
6,606

6,000

5,000

4,000

3,307
3,307

3,000

Most prior to
COVID-19
2,000

1,000

680 680

671 671695 695

665 665

0

18 Sep 18-Sep-82
25 Sep 25-Sep-82
2 Oct 2-Oct-82
28 Mar28-Mar-09
1982
1982
1982
2009

21 Mar2020

21-Mar-20

28 Mar2020

28-Mar-20

4 Apr
2020

4-Apr-20

Source: Federal Reserve Bank of St. Louis.
Duff & Phelps

April 16, 202059

University of Michigan Consumer SentimentDecember 1978 – April 2020
120

100

80

60

Average Monthly Index
Level
Over Period = 86.3
March 2020
89.1

40

University of Michigan
Consumer Sentiment Index
20

April 2020
71.0
Largest eversingle monthdrop (-18.1)

Average Monthly Index Level
Over Period0

Source: University of Michigan.
Duff & Phelps

April 16, 2020

60

U.S. Monthly Economic Policy Uncertainty Index
January 1, 2008 – March 31, 2020
700.0

600.0

500.0

U.S. Economic Policy Uncertainty Index (Month-end)
September 15, 2008
626.0
Lehman Brothers
Declares Bankruptcy

EPU Long-term (Jan-2008–Mar-2020) Average = 117.2

March 31, 2020
522.2

December 19, 2019
105.8
(D&P lowers ERP to
5.0% from 5.5%)

August 5, 2011
320.0
S&P Downgrades U.S.
Credit Rating

400.0

300.0
June 23, 2016
96.1 Brexit Vote

200.0

100.0

0.0

Source: Economic Policy Uncertainty
Duff & Phelps

April 16, 202061

Default Spread Model
January 2008 – March 23, 2020
8.0%

7.5%

Duff & Phelps U.S. ERP Recommendation

7.0%

March 23, 2020
6.2%
Conditional U.S. ERP (CERP) Based on Default Spread Model (Baa - Aaa)
(D&P increases
ERP to 6.0% from
5.0%)

6.5%

6.0%

5.5%

5.0%

4.5%

4.0%

October 27, 2008
(D&P raises ERP
to 6.0% from
5.0%)

3.5%

Source of Underlying Data: Bloomberg Barclays US Corp Baa Long Yld USD (Yield) and Bloomberg Barclays US Corp Aaa Long Yld USD (Yield). Morningstar Direct.
Duff & Phelps

April 16, 2020

62

Damodaran Implied ERP vs Duff & Phelps Recommended ERP
December 31, 2008 – March 24, 2020
Duff & Phelps Recommended ERP

Arithmetic Adjusted Damodaran Implied ERP (using the average cash flow yield of S&P 500 constituents from the previous 12 months) vs.
Normalized 20-year Risk-free Rate
8.0%

Arithmetic Adjusted Damodaran Implied ERP (using the average cash flow yield of S&P 500 constituents from the previous 10 years) vs.
Normalized 20-year Risk-free Rate

7.5%

7.0%

6.5%

6.45%

6.0%

6.06%

5.5%

5.0%

4.5%

4.0%

3.5%

Source: Aswath Damodaran. http://pages.stern.nyu.edu/~adamodar/
Duff & Phelps

April 16, 202063

Duff & Phelps U.S. Recommended ERP and Corresponding Risk-free Rates
January 2008 – Present

10.5%
10.1%
9.5%

10.0%

9.6%

9.5%

9.0%

9.0%

9.0%

9.0%

9.0%
8.0%

8.5%

9.0%

6%

Risk-Free Rate (Spot & Normalized)

Duff & Phelps

D&P Recommended U.S. ERP

Dec-19Aug-19Apr-19Dec-18Aug-18Apr-18Dec-17Aug-17

Apr-17

Dec-16Aug-16

Apr-16

Dec-15Aug-15

Apr-15

Dec-14Aug-14Apr-14

Dec-13Aug-13Apr-13

Dec-12

Aug-12

Apr-12

Dec-11

Aug-11

Apr-11

Dec-10Aug-10

Apr-10

Dec-09Aug-09Apr-09Dec-08Aug-08Apr-08Dec-07

3%

Base Cost of Equity

April 16, 202064

Spot 20-year U.S. Government Yield in Conjunction with Unadjusted “Historical” Equity
Risk Premium*2007 – March 25, 2020

11.6%

11.3%

10.8%

10.7%

9.5%
9.2%

9.7%

9.6%

9.5%

9.2%

9.8%

9.7%

9.4%
8.4%

7.2%

Risk-Free Rate (Spot)Historical ERP (1926-Present)

Mar-20Dec-19Aug-19Apr-19Dec-18Aug-18Apr-18Dec-17Aug-17

Apr-17

Dec-16Aug-16

Apr-16

Dec-15Aug-15

Apr-15

Dec-14Aug-14Apr-14

Dec-13Aug-13Apr-13

Dec-12

Aug-12

Apr-12

Dec-11

Aug-11

Apr-11

Dec-10Aug-10

Apr-10

Dec-09Aug-09Apr-09Dec-08Aug-08Apr-08Dec-07

1.2%

Base Cost of Equity*The Historical Equity Risk Premium is defined as the ERP over the years 1926–Present as of the date of the analysis. For example The Historical Equity Risk
Premium for December 2018 spans the years 1926–2018 while the Historical ERP for 2019 spans the years 1926–2019.
Duff & Phelps

April 16, 202065

Inferred ERP:
Using the D&P U.S. Recommended ERP against a Spot Risk-Free Rate
As of March 25, 2020

Duff & Phelps U.S.
Recommended ERP

6.0%

Duff & Phelps

Normalized Risk
Free Rate

Spot 20-Year U.S.
Treasury Yield+ 3.0% ‒ 1.23% =Inferred U.S. ERP

7.77%

April 15, 202066

Country
Risk

Duff & Phelps

16 July 201967

Estimating the Cost of Capital from Empirical Data

Cost of Capital Navigator: International Cost of Capital Module(Previously the Valuation Handbook – International Guide to Cost of Capital)

Available Models:•Country Yield Spread Model – Country Risk Premia (CRPs)•

Country Credit Rating Model – Country Risk Premia (CRPs)•

Relative Volatility Model – Relative Volatility (RV) Factors

Country-level data

Duff & Phelps

16 July 201968

Global Country Risk Map
Data as of December 31, 2019https://dpcostofcapital.com/international-cost-of-capital
Duff & Phelps

April 16, 202069

Country Yield Spread Model – Italy Observed Yield Spreads in Euros
December 31, 2019 – April 9, 2020

December 31, 2019
CRP = 2.1%
(D&P Q4 2019
Country Risk Update)

3.75%

Mid-Yield to Maturity

3.25%

March 31, 2020
CRP = 2.4%
(D&P Q1 2020
Country Risk Update)
3.00%

March 12, 2020
CRP = 3.0%
(Lagarde remarks that it is not
the ECB’s job to "close"
spreads between countries)

2.50%

2.75%
2.00%
2.25%
1.75%

Italy

1.25%

1.50%

April 9, 2020
CRP = 2.4%
1.00%

0.75%

0.25%

Observed Yield Spread

4.25%

March 18, 2020
CRP = 2.8%
(ECB unveils €750 billion Pandemic
Emergency Purchase Programme)

Germany
0.50%-0.25%-0.75%

0.00%

Source: Bloomberg, Duff & Phelps Analysis

Duff & Phelps

April 16, 202070

Country Yield Spread Model – Spain Observed Yield Spreads in Euros
December 31, 2019 – April 9, 2020

3.75%

December 31, 2019
CRP = 1.0%
(D&P Q4 2019
Country Risk Update)

Mid-Yield to Maturity

3.25%

2.00%

1.50%

2.75%
2.25%

April 9, 2020
CRP = 1.5%

1.75%

1.00%

1.25%
0.75%

Spain
0.50%

0.25%

Germany-0.25%

0.00%-0.75%

Source: Bloomberg, Duff & Phelps Analysis

Duff & Phelps

April 16, 2020

71

Observed Yield Spread

4.25%

March 18, 2020
CRP = 1.9%
(Spain sees spike in cases anddeaths. On the same day, ECB
unveils €750 billion Pandemic
Emergency Purchase
Programme)

March 31, 2020
CRP = 1.6%
(D&P Q1 2020
Country Risk Update)Country Yield Spread Model – Brazil Observed Yield Spreads in USD

12.00%
11.50%
11.00%
10.50%
10.00%
9.50%
9.00%
8.50%
8.00%
7.50%
7.00%
6.50%
6.00%
5.50%
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%

March 20, 2020
5.3%
(Brazil declares stateof emergency )December 31, 2019
2.6%
(D&P Q4 2019
Country Risk Update)

March 31, 2020
4.6%
(D&P Q1 2020
Country Risk Update)

6.00%

5.00%

March 11, 2020
3.6%
(WHO declares
COVID19 pandemic)

4.00%

April 9, 2020
4.6%
3.00%

2.00%

Brazil1.00%

United States
0.00%

Source: Bloomberg, Duff & Phelps Analysis

Duff & Phelps

April 16, 2020

72

Observed Yield Spread

Mid-Yield to Maturity

December 31, 2019 – April 9, 2020

Country Yield Spread Model – China Observed Yield Spreads in USD
December 31, 2019 – April 9, 2020

5.5%
5.0%

December 31, 2019
CRP = 0.8%
(D&P Q4 2019 Country
Risk Update)

March 20, 2020
CRP = 1.6%
(Turning point: China reports no new
locally-transmitted cases for second
straight day since pandemic began)

March 31, 2020
CRP = 1.3%
(D&P Q1 2020
Country Risk Update)

1.6%
1.4%

4.0%
3.5%

March 11, 2020
CRP = 1.0%
(WHO declares COVID19 a pandemic)

1.2%

1.0%

April 9, 2020
CRP = 1.2%

3.0%
2.5%

China

0.6%
0.4%

2.0%

1.5%

0.8%

United States

0.2%

1.0%

0.0%

Source: Bloomberg, Duff & Phelps Analysis

Duff & Phelps

April 16, 2020

73

Observed Yield Spread

Mid-Yield to Maturity

4.5%

Country Yield Spread Model – South Korea Observed Yield Spreads in USD
December 31, 2019 – March 31, 2020

March 31, 2020
0.8%
(D&P Q1 2020
Country Risk Update)

5.0%

Mid-Yield to Maturity

4.5%

December 31, 2019
0.5%
(D&P Q4 2019
Country Risk Update)

4.0%
3.5%

March 11, 2020
0.5%
(WHO declares
COVID19 pandemic)

3.0%

2.5%

April 9, 2020
0.8%

1.0%

0.8%

March 18, 2020
0.6%
(Second wave of new
infections due to"imported" cases)

0.6%

0.4%

South Korea

2.0%

Observed Yield Spread

5.5%

0.2%

United States
1.5%

1.0%

0.0%

Source: Bloomberg, Duff & Phelps Analysis

Duff & Phelps

April 16, 202074

Country Yield Spread Model – U.S. Dollar Observed Yield Spreads
Selection of Oil Revenue Dependent Countries
Comparison between December 31, 2019 and March 31, 2020
30.0%

12/31/2019

3/31/2020

25.0%

Observed Yield Spread (USD)

21.2%
20.0%

16.3%
15.0%

14.6%

13.7%

11.8%
10.0%

6.1%
5.0%

5.8%
4.1%

4.0%

3.1%

0.0%
Angola

Gabon

Ghana

Iraq

Nigeria

Source: Bloomberg, Duff & Phelps Cost of Capital Navigator - International Module

Duff & Phelps

April 16, 202075

Country Risk Premium (CRP) Over Time – Germany Investor Perspective (in EUR)Country Credit Rating Model
Comparison between September 30, 2019, December 31, 2019, and March 31, 2020

14.0%

30-Sep-19

31-Dec-19

31-Mar-20

Country Risk Premium (CCR Model)

12.0%
10.8%

10.0%

9.2%

8.0%

7.5%

7.7%

8.1%
7.5%

7.5%

6.9%

6.4%
6.0%

4.0%

2.0%

0.0%
Argentina

Ecuador

LebanonSource: Duff & Phelps Cost of Capital Navigator – International Cost of Capital Module

Duff & Phelps

April 16, 202076

Other Cost of Capital Inputs

Duff & Phelps

16 July 201977

Other Cost of Capital Inputs
Selected Tips
Cost of Capital Input

Post Coronavirus Considerations(Asset) Beta –Unlevered•

Significant equity market declines can lead to greater debt % in thecapital structure•

May significantly distort the calculated unlevered betas. Hamada
unlevering formula may exacerbate the issue.

•

Consider using other unlevering methods (e.g. Harris-Pringle) in thecurrent environment

Pre-Tax Cost of
Debt•

Don’t automatically assume BBB rating for industry peers.

•

Subsidized or below-market interest rate loans should not be used in
WACC calculation. Instead, discreetly model the associated benefits
and add those to the value of the firm.

Capital Structure•

Corporate finance theory tells us to use market value weights for debt
component•

Don’t automatically assume debt book value = market value•

Review Fair Value footnotes in annual & interim financials•

Consider averages instead of point-in-time capital structure

Duff & Phelps

April 15, 202078

Takeaways of today’s presentation• COVID-19 profoundly changed key value drivers:– Existing Cash Flows– Projected Growth in Cash Flows– Discount Rates• Need to adjust cash flow projections for information known as of the valuation date:– Use multiple sources of data, particularly when there is a heighted level of uncertainty– Scenario Analyses will likely be a better way to capture some of that uncertainty.
– Discount rates cannot solve all the issues• Interest rates of safe-haven countries are likely to stay low for a long-time due to Central Banks actions• Equity Risk Premium is cyclical. Historical measures are countercyclical and used without further adjustments
may lead to the wrong conclusion:– Post-coronavirus Base Cost of Equity should not be lower than prior to the outbreak• Country Risk changes over time to reflect current economic and market conditions• Other cost of capital inputs may be distorted

Duff & Phelps

April 16, 2020

79

Cost of Capital Navigator
An online platform that guides you through the process of estimating cost of capital, a key
component of any valuation analysis. You can subscribe to three cost of capital modules,
each offering three annual subscription levels: Basic, Pro and Enterprise.

Learn More: dpcostofcapital.com
Duff & Phelps

April 16, 202080

Upcoming COVID-19 Webcasts from Duff & Phelps
April 21, 2020
Impact of COVID-19 on Goodwill Impairment – Perspectives from U.S. GAAP and IFRS
https://www.duffandphelps.com/insights/events/2020/webcast-impact-covid-19-on-goodwill-impairment

April 22, 2020
Cyber Deep Dive: COVID-19 and Other Threats to the Healthcare Sector
https://www.kroll.com/en/insights/events/2020/covid-19-and-other-threats-healthcare-sector

April 23, 2020
COVID-19 and OPEC Price War-Implications for Oil and Gas Markets, Prices, and Companies
https://www.kroll.com/en/insights/events/2020/covid-19-and-other-threats-healthcare-sector

April 23, 2020
COVID-19 Transfer Pricing Webcast: IP Valuation, Benchmarking and Tax Administration Implications
https://www.kroll.com/en/insights/events/2020/covid-19-and-other-threats-healthcare-sector

Learn More: dpcostofcapital.com
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April 16, 202081

Thank You!

Duff & Phelps

Carla S. Nunes, CFAJames Harrington

carla.nunes@duffandphelps.com

james.harrington@duffandphelps.com

April 16, 202082

Appendix

Duff & Phelps

16 July 201983

Duff & Phelps Recommended Equity Risk Premium (ERP) andCorresponding Risk-Free Rates
Date

Risk-free Rate (R f )R f (%)

Duff & Phelps
Recommended
ERP (%)March 25, 2020 − UNTIL FURTHER NOTICENormalized 20-year U.S. Treasury yield

3.00

6.00

ERP

December 19, 2019 − March 24, 2020

Normalized 20-year U.S. Treasury yield

3.00

5.00

ERP

September 30, 2019 − December 18, 2019

Normalized 20-year U.S. Treasury yield

3.00

5.50

Rf

December 31, 2018 − September 29, 2019

Normalized 20-year U.S. Treasury yield

3.50

5.50

ERP

September 5, 2017 − December 30, 2018

Normalized 20-year U.S. Treasury yield

3.50

5.00

ERP

November 15, 2016 − September 4, 2017

Normalized 20-year U.S. Treasury yield

3.50

5.50

Rf

January 31, 2016 − November 14, 2016

Normalized 20-year U.S. Treasury yield

4.00

5.50

ERP

December 31, 2015

Normalized 20-year U.S. Treasury yield

4.00

5.00

December 31, 2014

Normalized 20-year U.S. Treasury yield

4.00

5.00

December 31, 2013

Normalized 20-year U.S. Treasury yield

4.00

5.00

February 28, 2013 – January 30, 2016

Normalized 20-year U.S. Treasury yield

4.00

5.00

December 31, 2012

Normalized 20-year U.S. Treasury yield

4.00

5.50

January 15, 2012 − February 27, 2013

Normalized 20-year U.S. Treasury yield

4.00

5.50

December 31, 2011

Normalized 20-year U.S. Treasury yield

4.00

6.00

September 30, 2011 − January 14, 2012

Normalized 20-year U.S. Treasury yield

4.00

6.00

ERP

July 1 2011 − September 29, 2011

Normalized 20-year U.S. Treasury yield

4.00

5.50

Rf

June 1, 2011 − June 30, 2011

Spot 20-year U.S. Treasury yield

Spot

5.50

Rf

May 1, 2011 − May 31, 2011

Normalized 20-year U.S. Treasury yield

4.00

5.50

Rf

December 31, 2010

Spot 20-year U.S. Treasury yield

Spot

5.50

December 1, 2010 − April 30, 2011

Spot 20-year U.S. Treasury yield

Spot

5.50

Rf

June 1, 2010 − November 30, 2010

Normalized 20-year U.S. Treasury yield

4.00

5.50

Rf

December 31, 2009

Spot 20-year U.S. Treasury yield

Spot

5.50

December 1, 2009 − May 31, 2010

Spot 20-year U.S. Treasury yield

Spot

5.50

ERP

June 1, 2009 − November 30, 2009

Spot 20-year U.S. Treasury yield

Spot

6.00

Rf

December 31, 2008

Normalized 20-year U.S. Treasury yield

4.50

6.00

What
ChangedCurrent Guidance:

Duff & Phelps*Normalized in this context
means that in months where therisk-free rate is deemed to beabnormally (i.e., unsustainably)
low, a proxy for a longer-termsustainable risk-free rate is
used.

ERP

ERP

Table is available at:www.duffandphelps.com/insights/publications/cost-ofcapital84

Are country risks real?

I know how to value a company in the United States, but this one is in
Country X, a developing economy…what should I use for a discount rate?
Duff & Phelps

16 July 201985

Risks typically associated with international investment

These risks may include:

Political

Financial

Economic

Each of these risks is a problem for the discount rate only to the extent that it
is non-diversifiable from the perspective of the investor, which is often thecase.

Duff & Phelps

16 July 201986

Which International Cost of Equity Model Should I Use?

In choosing a model, the goal is to balance several objectives:
Acceptance and use: The model has adegree of acceptance, and the model isactually used by valuation analysts.

Data Availability: Quality data is available
for consistent and objective application of
the model.
Simplicity: The model’s underlying
concepts are understandable, and can be
explained in plain language.

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16 July 201987

Which International Cost of Equity Model Should I Use?

When selecting a model (or models), it is important to remember:
There is no consensus among academics andpractitioners as to the best model to use inestimating the cost of equity capital in a global
environment, particularly with regards tocompanies operating in emerging economies.

There are several common approaches to incorporating country
factors into a cost of equity capital estimate.
None are perfect.

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