COVID-19 One Year Later
Impact on Cost of Capital and Related Valuation Issues
May 20, 2021
Presented by:Carla S. Nunes, CFAJames P. Harrington

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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 other professional service
through presentation of this material.
The information presented in this session has been obtained with the greatest of care from sources believed to bereliable, 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.

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Carla S. Nunes, CFA
MANAGING DIRECTOR – VALUATION DIGITAL SOLUTIONS•

Carla Nunes is a Managing Director in the Office of Professional Practice of Duff & Phelps, A Kroll Business. She hasover 25 years of experience. In that role, Carla provides firm-wide technical guidance on a variety of valuation, financial
reporting and tax issues. She also co-authors Duff & Phelps’ annual U.S. and European Goodwill Impairment Studies. In
addition, Carla is the Global Leader of Duff & Phelps’ Valuation Digital Solutions group, which produces cost of capitalthought leadership content and data housed in the Cost of Capital Navigator.

•

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 has conducted numerous business and asset valuations for a variety of purposes, including purchase priceallocations, goodwill impairment testing, M&A, corporate tax restructuring and debt analysis. She has been involved in
multiple valuation assignments for a wide range of industries, including pharma & biotech, healthcare, vitamin retail,specialty chemicals, industrial manufacturing and gaming & hospitality. Carla has substantial experience with crossborder valuations, working with multinational corporations to address complex tax, international cost of capital and foreignexchange issues.

•

Carla is one of Duff & Phelps’ experts addressing valuation issues related to cost of capital. She is a co-author of the“Valuation Handbook” series and is a co-creator of the Duff & Phelps Cost of Capital Navigator. Carla is a frequent
speaker in webinars and conferences on the topics of cost of capital, goodwill impairment and valuation in general.

•

Carla is Kroll Institute Fellow and a member of the Education Committee of the International Institute of Business Valuers(iiBV).

•

Carla received her M.B.A. in finance from the University of Rochester's Simon School, an honors degree is busines
administration from Lisbon's School of Economics and Management (ISEG Lisbon) and completed coursework for a
Masters of Taxation from Villanova University School of Law. Additionally, she holds a Chartered Financial Analyst (CFA)
designation and has passed the exam and fulfilled all the requirements for the Certified in Entity and Intangibles
Valuations (CEIV) credential.

CONTACT:
carla.nunes@duffandphelps.com

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May 20, 2021

7

James Harrington
Director – Valuation Digital Solutions
James P. Harrington is a Director at Duff & Phelps, A Kroll Company (“D&P/Kroll”). James is a member ofthe D&P/Kroll Valuation Digital Solutions group, which produces cost of capital thought leadership content
and data housed in the Cost of Capital Navigator at dpcostofcapital.com.

James also provides technical support on client engagements involving cost of capital and businessvaluation matters and is a leading contributor to Duff & Phelps’ efforts in the development of studies, surveys,
online content and tools, and firm-wide valuation models.

CONTACT:
james.harrington@duffandphelps.com

Previously, James was director of valuation research in Morningstar's Financial Communications Businesswhere he led the group that produced the Stocks, Bonds, Bills, and Inflation® (SBBI®) Valuation Yearbook,
Stocks, Bonds, Bills, and Inflation® (SBBI®) Classic Yearbook, Cost of Capital Yearbook, various international
cost of capital reports, and created a website dedicated to cost of capital issues.
James is co-author of the Duff & Phelps “Valuation Handbook” series with colleagues Carla Nunes andRoger Grabowski. The four Valuation Handbooks were published as physical books starting in 2014; as of2021 the information and data previously published in the Valuation Handbooks has been transitioned over tothe Duff & Phelps Cost of Capital Navigator at dpcostofcapital.com.
James is co-author of the Stocks, Bonds, Bills, and Inflation® (SBBI®) 2021 Summary Edition with Roger
Ibbotson (Professor in the Practice Emeritus of Finance at Yale School of Management). The (SBBI®) 2021
Summary Edition is produced in a partnership of D&P/Kroll, the CFA Institute Research Foundation, andMorningstar, Inc. James is a contributing author to Cost of Capital: Applications and Examples, 5th edition, by
Shannon P. Pratt and Roger J. Grabowski (John Wiley & Sons, Inc., 2014). James is a contributing author to
the upcoming Shannon Pratt’s Valuing a Business – The Analysis and Appraisal of Closely Held Companies,
Sixth ed. (McGraw-Hill, expected publication date 2021).

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

May 20, 20218

Today’s Presentation

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

01

PROJECTED ECONOMIC GROWTH

02

FINANCIAL MARKET PERFORMANCE

03

RISK-FREE RATE ANALYSIS

04

U.S. EQUITY RISK PREMIUM

05

EUROZONE EQUITY RISK PREMIUM

06

INDUSTRY BETAS07

COUNTRY RISKMay 20, 2021

9

01

Projected Economic GrowthWhere We Stand: The Status of the Global Economy“

The pandemic is yet to be defeated and virus cases areaccelerating in many countries. Recoveries are also
diverging dangerously across and within countries,
as economies with slower vaccine rollout, more limited
policy support, and more reliance on tourism do less
well.

”

Duff &and
Phelps,A Kroll BusinessPrivateConfidential– “Managing Divergent Recoveries”, IMF Blog, April 6, 2021
by Gita Gopinath, IMF Economic Counsellor and Director of Research

May 20, 2021

11

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.

World Bank

4.

Blue Chips Economic Indicators

5.

Consensus Economics

6.

Economist Intelligence Unit (EIU)

7.

Fitch Ratings

8.

IHS Markit

9.

Moody’s Analytics

10. Oxford Economics
11. Standard & Poor’s

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

May 20, 2021

12

Real GDP Growth (%) Estimates by Region: World
Data as of May 18, 2021

Cumulative
Growth (%)
2020–2021

After COVID-19

Compound Annual
Growth Rates (%)
2020 to 2021

BeforeCOVID-19

5.3

2.6

After
COVID-19

2021

2.0

1.0

5.7

2022

4.2

2020

-3.5

Before COVID-19 median estimates based on data released in December 2019 and early January of 2020. After COVID-19 median estimates based on data available as of the date noted above.
Compound annual growth rate (CAGR) is calculated as the annualized rate of return of median real GDP growth rate estimates from the end of 2019 through the end of 2021: [(1 + 2020 Real GDP Growth Rate) * ( 1 + 2021 Real GDP Growth Rate ) ] ^ (1/2) – 1. Cumulative
growth is calculated as the total (cumulative) growth rates of median real GDP estimates from the end of 2019 through the end of 2021: (1 + 2020 Real GDP Growth Rate ) * ( 1 + 2021 Real GDP Growth Rate ) – 1. These metrics show the annualized and cumulative real
GDP growth rates that were expected at the end of 2019 (Before COVID-19) for the 2020–2021 period versus what the expectations are currently (After COVID-19).

Private and Confidential

May 20, 2021

13

COVID-19 Vaccine Tracker

U.S. 277M
Doses given – enoughfor 43.2% coverage

India 187M
Doses given – enoughfor 6.8% coverage
Brazil 60M
Doses given – enoughfor 14.3% coverage

Source: Bloomberg
Private and Confidential

May 20, 2021

14

Real GDP Growth (%) Estimates by Region: United States
Data as of May 18, 2021

Cumulative
Growth (%)
2020–2021

Compound Annual
Growth Rates (%)
2020 to 2021

After COVID-19

BeforeCOVID-19

3.8

After
COVID-19

2021

2.8

6.5

1.9

2022

3.9
1.4

2020

-3.5

Before COVID-19 median estimates based on data released in December 2019 and early January of 2020. After COVID-19 median estimates based on data available as of the date noted above.
Compound annual growth rate (CAGR) is calculated as the annualized rate of return of median real GDP growth rate estimates from the end of 2019 through the end of 2021: [(1 + 2020 Real GDP Growth Rate) * ( 1 + 2021 Real GDP Growth Rate ) ] ^ (1/2) – 1. Cumulative
growth is calculated as the total (cumulative) growth rates of median real GDP estimates from the end of 2019 through the end of 2021: (1 + 2020 Real GDP Growth Rate ) * ( 1 + 2021 Real GDP Growth Rate ) – 1. These metrics show the annualized and cumulative real
GDP growth rates that were expected at the end of 2019 (Before COVID-19) for the 2020–2021 period versus what the expectations are currently (After COVID-19).

Private and Confidential

May 20, 2021

15

Real GDP Growth Before & After COVID-19: United States
Data as of May 18, 2021

104

103.8
102.8

102

100

101.9

100.0

98

97.9
96.5

96

93.9

94

92
2019

2020
December 2019 (Pre- COVID-19)

Duff &and
Phelps,A Kroll BusinessPrivateConfidential2021
Jun-2020

May-2021

May 20, 2021

16

U.S. Fiscal Policy Response to COVID-19 as a Proportion of Nominal GDP

Size of Combined
COVID-19 Fiscal
Stimulus Packages:$21.4 Trillion

27%$20.9 Trillionof 2019 Nominal GDP

Decline in
Nominal GDP =$497 Billion
U.S. Government
COVID-19 Relief
Packages$5.7 Trillion

2019
CARES Act

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

2020
Consol. Appropriations Act

American Rescue Plan Act - 2021

Mar-2020 to Mar-2021
Other

Nominal GDP

May 20, 2021

17

Real GDP Growth (%) Estimates by Region: Eurozone

Cumulative
Growth (%)
2020–2021

Compound Annual
Growth Rates (%)
2020 to 2021

After COVID-19

BeforeCOVID-19

2.3

1.1

2021

After
COVID-19

Data as of May 18, 2021

-2.8

-1.4

2022

4.2 4.2
2020-6.7

Before COVID-19 median estimates based on data released in December 2019 and early January of 2020. After COVID-19 median estimates based on data available as of the date noted above.
Compound annual growth rate (CAGR) is calculated as the annualized rate of return of median real GDP growth rate estimates from the end of 2019 through the end of 2021: [(1 + 2020 Real GDP Growth Rate) * ( 1 + 2021 Real GDP Growth Rate ) ] ^ (1/2) – 1. Cumulative
growth is calculated as the total (cumulative) growth rates of median real GDP estimates from the end of 2019 through the end of 2021: (1 + 2020 Real GDP Growth Rate ) * ( 1 + 2021 Real GDP Growth Rate ) – 1. These metrics show the annualized and cumulative real
GDP growth rates that were expected at the end of 2019 (Before COVID-19) for the 2020–2021 period versus what the expectations are currently (After COVID-19).

Private and Confidential

May 20, 2021

18

Real GDP Growth (%) Estimates by Region: China
Data as of May 18, 2021
After COVID-19

After
COVID-19

BeforeCOVID-19

Cumulative
Growth (%)
2020–2021

11.8
10.9

Compound Annual
Growth Rates (%)
2020 to 2021

5.7
5.3

2021

8.4
2022
2020

5.4

2.3

Before COVID-19 median estimates based on data released in December 2019 and early January of 2020. After COVID-19 median estimates based on data available as of the date noted above.
Compound annual growth rate (CAGR) is calculated as the annualized rate of return of median real GDP growth rate estimates from the end of 2019 through the end of 2021: [(1 + 2020 Real GDP Growth Rate) * ( 1 + 2021 Real GDP Growth Rate ) ] ^ (1/2) – 1. Cumulative
growth is calculated as the total (cumulative) growth rates of median real GDP estimates from the end of 2019 through the end of 2021: (1 + 2020 Real GDP Growth Rate ) * ( 1 + 2021 Real GDP Growth Rate ) – 1. These metrics show the annualized and cumulative real
GDP growth rates that were expected at the end of 2019 (Before COVID-19) for the 2020–2021 period versus what the expectations are currently (After COVID-19).

Private and Confidential

May 20, 2021

19

Real GDP Growth (%) Estimates by Region: India
Data as of May 18, 2021
After COVID-19

Cumulative
Growth (%)
2020–2021

2021

Compound Annual
Growth Rates (%)
2020 to 2021

10.4

BeforeCOVID-19

12.7

6.1

After
COVID-19

2022

2.1

1.1

6.1
2020

-7.5

Before COVID-19 median estimates based on data released in December 2019 and early January of 2020. After COVID-19 median estimates based on data available as of the date noted above.
Compound annual growth rate (CAGR) is calculated as the annualized rate of return of median real GDP growth rate estimates from the end of 2019 through the end of 2021: [(1 + 2020 Real GDP Growth Rate) * ( 1 + 2021 Real GDP Growth Rate ) ] ^ (1/2) – 1. Cumulative
growth is calculated as the total (cumulative) growth rates of median real GDP estimates from the end of 2019 through the end of 2021: (1 + 2020 Real GDP Growth Rate ) * ( 1 + 2021 Real GDP Growth Rate ) – 1. These metrics show the annualized and cumulative real
GDP growth rates that were expected at the end of 2019 (Before COVID-19) for the 2020–2021 period versus what the expectations are currently (After COVID-19).

Private and Confidential

May 20, 2021

20

02

Financial Market Performance

MSCI Developed, Emerging, and Frontier Markets
Market Performance During the COVID-19 Pandemic
Developed Markets
Year End 2019 –March 2020
Australia-33.2%
Worst -42.9%
Austria
Belgium-32.5%
Canada-27.4%
Best -7.7%
Denmark
Finland-18.9%
France-27.5%
Germany-27.0%
Hong Kong-17.3%
Ireland-25.5%
Israel-18.0%
Italy-29.2%
Japan-16.6%
Netherlands-20.6%New Zealand-16.3%
Norway-33.3%
Portugal-13.1%
Singapore-28.2%
Spain-29.7%
Sweden-21.4%
Switzerland-11.1%
United Kingdom-28.8%
United States-19.6%

Average
Median-23.7%-25.5%

Duff &and
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Emerging Markets
Year End 2019 –March 2020

April 2020 –April 2021
77.0%
93.7%
42.8%
67.7%
62.6%
59.1%
60.3%
66.1%
41.5%
65.1%
48.9%
54.8%
38.0%
83.5%
33.5%
71.6%
Worst 29.7%
44.9%
44.7%
84.1%
30.5%
39.4%
68.0%

Best

56.9%
59.1%

Frontier Markets

Argentina
Worst
Brazil
Chile
Best
China
Colombia
Czech Republic
Egypt
GreeceHungary
India
Indonesia
Korea
KuwaitMalaysia
MexicoPakistan
Peru
Philippines
PolandQatar
RussiaSaudi Arabia
South Africa
TaiwanThailandTurkeyUnited Arab Emirates

Average
MedianApril 2020 –April 2021

-39.3%-50.2%-33.4%-10.2%-49.7%-38.5%-27.1%-45.1%-39.0%-31.1%-39.4%-22.4%-26.8%-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%

87.8%
56.2%
53.1%
45.8%
24.6%
76.4%
Worst 3.0%
45.4%
47.4%
75.4%
41.3%
96.2%
39.0%
25.0%
63.4%
35.5%
24.1%
27.7%
41.2%
24.7%
45.5%
67.6%
81.3%
Best 109.6%
38.1%
5.9%
58.9%

-32.5%-33.7%

49.6%
45.5%

Year End 2019 –March 2020
Bahrain
Bangladesh
Croatia
Estonia
JordanKenya
Kazakhstan
Lithuania
Mauritius
MoroccoNigeria
Oman
Romania
SerbiaSlovenia
Sri Lanka
Tunisia
Vietnam-22.2%-17.9%-18.5%-31.1%-9.9%-24.8%-23.6%-22.9%
Worst -37.9%-26.0%-33.0%-11.1%-30.8%-27.5%-22.7%-34.5%
Best -6.4%-31.0%

Average
MedianApril 2020 –April 2021
16.8%
39.6%
34.3%
35.9%
Worst -41.0%
41.0%Best 117.2%
53.6%
1.6%
41.7%
83.4%
39.8%
61.9%
35.8%
77.7%
24.7%
20.7%
88.3%

-24.0%-24.2%
May 20, 2021

43.0%
39.7%
22

MSCI Developed, Emerging, and Frontier Markets
Market Performance During the COVID-19 Pandemic

Value of $1 invested at midnight on March 31, 2020 and held through April 30, 2021

April 2020 – April 2021

Developed Markets

Emerging
Markets
Emergin Markets

Frontier Markets

$1.57

$1.50

$1.43

Value of $1 invested at midnight on December 31, 2019* and held through April 30, 2021

Year End 2019 – April 2021

Private and Confidential

Developed Markets

EmergingMarkets
Markets
Emergin

Frontier Markets

$1.19

$1.01

$1.08

May 20, 2021

23

S&P 500 (Price) Index
December 31, 2019 ‒ May 14, 2021

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Phelps,A Kroll BusinessPrivateConfidential

May 20, 2021

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STOXX 600 (Price) Index
December 31, 2019 ‒ May 14, 2021

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May 20, 2021

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S&P 500 (Price) Index and STOXX 600 (Price) Index
December 31, 2019 ‒ May 14, 2021; Time to Recover and Return Since 2020 Low

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U.S. Market Crashes, Using S&P 500 Price Index As The Benchmark
Length of Decline and Average Years to Recover

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

1987 Crash
16-Sep-29
31.86
29-Oct-29

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

20.43

S&P 500

224.84

S&P 500

776.76

Decline-35.9%

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

End date of the Decline

9-Mar-09

End date of the Decline

Years to Recover

7.18

23-Mar-20

S&P 500

2,237.40

Decline-56.8%

Decline-33.9%

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

1,530.23

3,386.15

676.53Years to RecoverS&P 500

19-Feb-20

S&P 500

S&P 500

30-May-07

COVID-19 Crash

Start Date of the Decline

Recovery Date

Recovery Date

28-Mar-13
1,569.19
5.47

Recovery Date
S&P 500
Years to Recover

18-Aug-20
3,389.78
0.50

May 20, 2021

27

U.S. Market Crashes, Using S&P 500 Price Index As The Benchmark
Length of Decline and Average Years to Recover

DECLINE 0 - 6 MONTHS 7 - 12 MONTHS 13 - 18 MONTHS 19 - 24 MONTHS 25 - 30 MONTHS 31 - 36 MONTHS>-80% and <= -90%

-

-

-

21.19

21.72

24.47

>-70% and <= -80%

-

4.7

5.48

15.54

21.04

19.73

>-60% and <= -70%

-

4.03

4.66

-

-

-

>-50% and <= -60%

0.71

2.75

4.9

5.48

5.38

-

>-40% and <= -50%

0.78

3.22

4.14

7.01

5.62

4.67

>-30% and <= -40%

1.13

1.69

2.48

2.62

3.33

3.86

>-20% and <= -30%

0.89

1.5

1.67

2.11

2.22

3.76

>-10% and <= -20%

0.56

1.04

1.56

2.12

2.37

2.8

> 0% and <= -10%

0.17

0.79

1.35

1.72

2.32

2.76

There were seven declines from this analysis that took 2 months or less and were less than -30% andgreater than or equal to -40%. The average recovery time of these seven declines was 0.53 years.
The actual time it took the S&P 500 to recover was 0.5 years.
Analysis performed over the time horizon December 31, 1927 through April 14, 2020 (daily).

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May 20, 2021

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03

Risk-free Rate Analysis

10-Year Yields for U.S., Germany, U.K., Japan
December 31, 2007 – April 30, 2021
6%
United States Treasury Constant Maturity - 10 Year
United Kingdom Government Debt - 10 Year
5%

Japan Government Debt - 10 YearGermany Government Debt - 10 Year

4%

3%

2%

1.65%
1%

0.84%
0.09%

0%

-0.28%-1%

Source: S&P Capital IQ

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May 20, 2021

30

Combined Major Central Banks Balance Sheets: Fed, ECB, BOE, BOJ
February 2020 – April 2021

% Change
After COVID-19

USD 24.1 Trillion

Feb 2020 – Apr 2021

Bank of England

84%

Bank of Japan

20%

European Central Bank

72%

U.S. Federal Reserve

85%

COVID-19

2008 Financial Crisis

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

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Phelps,A Kroll BusinessPrivateConfidential

May 20, 2021

31

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 to quality or
massive monetary policy interventions (i.e., QE or quantitative easing)
Duff & Phelps recommends normalizing the risk-free rate:

Abnormally Low Rf

Use Normalized Risk-free Rate

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May 20, 2021

32

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

Normalization can be accomplished in several ways, including:

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

1.

Simple averaging

2.

Various “buildup” methods

May 20, 2021

33

U.S. 20-Year Treasury Yield, Including Trailing Average
December 31, 2007 – April 30, 2021
2008
Financial Crisis
6.0%

10-year moving average
5.0%

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

4.0%

3.0%

2.6%
December 31, 2008
3.1%
2.0%

1.0%

0.0%

March 25, 2020
1.2%
(D&P increases ERP to
6.0% from 5.0%)

April 30, 2021
2.2%

December 09, 2020
1.5%
(D&P decreases ERP to5.5% from 6.0%)

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

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May 20, 2021

34

Risk-free Rate Normalization – by Build Up“Fisher Equation”

Conceptually, the risk-free rate can be (loosely) illustrated as the return on the following two
components:*

Risk-free
Rate

Real Rate

Expected
Inflation* This is a simplified version of the “Fisher equation”, named after Irving Fisher. Fisher’s “The Theory of Interest” was first published by Macmillan (New York), in 1930. The Fisher equation is formally
expressed as (1 + Nominal Rate) = (1 + Real Rate) x (1 + Expected Inflation). When rates are low, there is very little difference between the simple form and the Fisher equation. Various academic
research papers show that the decomposition of the nominal rate into a real rate and expected inflation should include an additional component excluded from the Fisher equation: the inflation risk
premium. This premium reflects the risk that actual inflation may vary significantly from expected inflation, and it can be positive or negative, with some academic estimates at close to 0%.
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35

Real Rate Estimates
United States

Several academic studies have suggested the long-term real risk-free rate to be somewhere in therange of -1.1% to 2.0% based on the study of inflation swap rates, yields on long-term U.S. Treasury
Inflation-Protected Securities (TIPS), OLG, DSGE and other econometric models *-1.1 %

Long-term Real Rate

2.0%

* Based on academic studies issued between 2015 and 2021. In academic literature, this is also sometimes called the natural rate of interest, the neutral rate, or the equilibrium rate.

OLG = Overlapping Generational Model
DGSE = Dynamic Stochastic General Equilibrium Model

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36

Long-Term Inflation Expectations
Estimates as of April 2021 (approximately)
SOURCESLong-Term Average (%)

Aruoba Term Structure of Inflation Expectations

2.3

Blue Chip Economic Indicators

2.3

Blue Chip Financial Forecasts

2.2

Consensus Economics

2.4

Federal Reserve Bank of Cleveland

1.6

Livingston Survey(Federal Reserve Bank of Philadelphia)

2.2

Survey of Professional Forecasters(Federal Reserve Bank of Philadelphia)

2.2

University of Michigan Survey 5-10 Year Ahead Inflation Expectations

2.7

Range of Inflation Estimates

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1.6% – 2.7%

Median2.2%

May 20, 2021

37

Risk-Free Rate Normalization – United States
As of April 30, 2021

-1.1%

2.0%

Long-term Real Rate

+

+

1.6%

2.7%

Long-term Expected Inflation

=

=

0.5%*

Long-term Normalized Risk-Free Rate

4.7%

•

Fisher Equation: Midpoint = 2.6% / Median = 2.8%•

LT Average: 10-Year Trailing Average of 20-Year U.S. Treasury Yield = 2.6%

Concluded Normalized Rf = 2.5%
* Differences due to rounding.

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Risk-Free Rate Normalization – Germany
As of April 30, 2021

-1.1%

1.5%

Long-term Real Rate

+

+

1.7%

1.9%

Long-term Expected Inflation

=

=

0.6%

Long-term Normalized Risk-Free Rate•

Fisher Equation: Midpoint = 2.0% / Median = 2.7%•

LT Average: 10-Year Trailing Average of 15-Year Bund Yield = 1.1%

3.4%

Concluded Normalized Rf = 2.0%
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39

04

U.S. Equity Risk Premium

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 anentire business cycle?

“What is the range?”

STEP 2: Research has shown that ERP is cyclical during the business cycle. We use
the term conditional ERP to mean the ERP that reflects current market conditions.

“Where are we in the range?”

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

3.5%

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Phelps,A Kroll BusinessPrivateConfidential＋

Forwardlooking ERP
Estimates

6.0%

Range of Unconditional ERP

May 20, 202142

Duff & Phelps Recommended U.S. Equity Risk Premium (ERP)For discount rates developed as of December 9, 2020 (and thereafter)

D&P
RECOMMENDED
U.S. ERP

5.5%
3.5%

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

Range of Unconditional ERP

6.0%

May 20, 2021

43Factors Considered in ERP Recommendation – Summary Table
Changes from December 9, 2020 to April 30, 2021
FactorFinancial Markets

ChangeEffect on ERP

U.S. Equity Markets▲▼

Implied Equity Market Volatility▼▼

Corporate Credit Spreads▼▼

U.S. Equity Market Uncertainty Index▼▼

Historical & Projected Real GDP Growth▲▼

Consumer Sentiment▲▼

Business Confidence

▲

▼

▼

▼

Damodaran Implied ERP Model
Default Spread Model

Economic Indicators

Unemployment

Sovereign Credit Ratings
Economic Policy Uncertainty (EPU) Index
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44

Labor Department’s April Jobs Report was a Large Miss
And the Unemployment Rate Rose 0.1% to 6.1%

Source: Bureau of Labor Statistics

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45

Current U.S. Normalized Risk-free Rate and ERP Recommendations
As of April 30, 2021

+

2.5%

Risk-Free Rate (Spot & Normalized)
10.5%

9.5%

10.1%

9.6%

=

5.5%

D&P Recommended U.S. ERP

8.0%
Base Cost of Equity

10.0%

9.5%
9.0%

9.0%

9.0%

9.0%

9.0%
8.5%

9.0%
8.0%

8.0%
8.0%
8.0%

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46

Spot 20-Year U.S. Government Yield in Conjunction with Unadjusted“Historical” Equity Risk Premium *December 31, 2007 – April 30, 2020

11.6%

11.3%
9.5%

10.8%

10.7%
9.2%

9.2%

9.5%

9.6%

9.7%

9.7%

9.8%

9.4%
8.4%

8.7%

9.4%

7.25%

2.19%

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

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 2019spans the years 1926–2019 while the Historical ERP for 2020 spans the years 1926–2020.

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Inferred ERP: Using the D&P U.S. Recommended ERP Against A Spot
Risk-free Rate
As of April 30, 2021

Duff & Phelps U.S.
Recommended ERP

5.5%

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20-Year U.S.
Government
Spot Yield

Normalized
Risk-free Rate

+

2.5%

–

2.2%

Inferred U.S. ERP

=

5.8%

May 20, 2021

48

05

Eurozone Equity Risk PremiumSummary Table of Factors – Eurozone
Changes from December 31, 2019 to April 30, 2021

FactorFinancial Markets

ChangeEffect on ERP

Implied Equity Market Volatility▲▲

Corporate Credit Spreads▼▼

Dividend Discount Model Implied ERP▲▲Historical & Projected Real GDP Growth▼▲

Unemployment▲▲

Consumer Sentiment▼▲

Business Confidence▲▼

European Equity Markets

Default Spread Model
Economic Indicators

Sovereign Credit Ratings
Economic Policy Uncertainty (EPU) Index

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50

EURO STOXX 50 Volatility Index
June 1, 2007 – April 30, 2021
90.0

80.0

70.0

60.0

50.0

What wasit yesterday?

March 18, 2020
84.8
ECB's Pandemic
Emergency
Puchase Program

May 03, 2010
28.7
Greek
Sovereign Debt
Crisis Bailout

The return from January 23, 2020
to April 30, 2021 on the STOXXEurope 600 Index was 4.13%

24.5
June 23, 2016
32.1
Brexit Vote

January 23, 2020
13.2
First COVID-19
lockdown in China

40.0

30.0
23.8

20.0

10.0

June 05, 2014
14.6
ECB's first negative rateand ABS purchases

April 30, 2021
20.6-

Source: S&P Capital IQ

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Phelps,A Kroll BusinessPrivateConfidential

May 20, 2021

51

Conditional ERP – Quantitative Models
December 2019, March 2020, April 2021

MODELS

December 2019

March 2020

April 2021

Default Spread Model *

4.4%

5.5%

4.4%

Dividend Discount Model (DDM) – Bottom-Up **

4.6%

6.8%

5.6%

Dividend Discount Model (DDM) – Top Down (Median)

5.5%

6.9%

6.0%

* The Default Spread Model is based on the premise that the long-term average ERP (the unconditional ERP) is constant and deviations from that average over an economic cycle can be measured
by reference to deviations from the long-term average of the default spread between corporate bonds rated in the Baa category by Moody’s versus those in the Aaa rating category. For more details
see: Jagannathan, Ravi, and Wang, Zhenyu,” The Conditional CAPM and the Cross -Section of Expected Returns,” The Journal of Finance, Volume 51, Issue 1, March 1996: 3–53.
** Bottom-Up Dividend Discount Model is based on the methodology outlined in: Pástor, Ľuboš, Meenakshi Sinha, and Bhaskaran Swaminathan. "Estimating the intertemporal risk–return tradeoff
using the implied cost of capital." The Journal of Finance 63, no. 6 (2008): 2859-2897.

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Dividend Discount Model (DDM) – Top Down
Defining the Models: Variation of Models Inputs

Projected EPS – Year 1

Payout Ratio – Year 1

1

Next 12 Months

Last 12 months

Interpolated to 1 −2

Next 12 Months

Last 12 months

Constant

3

Next 12 Months

4

Next 12 Months

5

Historical Inflation Adjusted EPS(10 years)

MODELS

10-year historical
average
10-year historical
average
10-year historical
average

Payout Ratio – Other Years
𝐿𝑇𝐺
𝑅𝑂𝐸(12𝑚)

Constant
Interpolated to 1 −𝐿𝑇𝐺
𝑅𝑂𝐸(10–year avg.)

Constant

ROE = Return on Equity
LTG= Long Term Growth Rate= 1 + 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝐺𝑟𝑜𝑤𝑡ℎ 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 × 1 + 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 - 1
Sources of data:• Earnings projections based on Refinitiv I/B/E/S Estimates• Payout Ratios and ROE are calculated based on data obtained from Refinitiv DataStream

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Long-term Projected Real GDP Growth
Estimates as of April 2021

Long-Term Average(%)

Last Year in the
Forecast (%)

Consensus Forecast

1.5

0.9

Economist Intelligence Unit

NMF

1.8

IHS Markit

1.8

1.2

IMF World Economic Outlook

2.1

1.1

Oxford Economics

1.6

0.7

PwC

1.9

1.4

SOURCEMedian1.8%

1.5% – 2.1% 0.7% – 1.8%
Range of Real GDP
Growth Estimates

Duff &and
Phelps,A Kroll BusinessPrivateConfidential

1.1%

MedianRange of Real GDP
Growth Estimates

May 20, 2021

54

Long-term Inflation Expectations
Estimates as of April 2021

SOURCE

Long-Term Average (%)

Consensus Forecast

1.8

Economist Intelligence Unit

1.7

IHS Markit

1.9

IMF World Economic Outlook

1.7

Oxford Economics

1.9

PwC

1.8

Range of Inflation Estimates

1.7% – 1.9%

1.8%MedianLong Term Growth Rate (Median) = 1 + 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝐺𝑟𝑜𝑤𝑡ℎ 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 × 1 + 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 - 1= (1 + 1.1%) x (1 + 1.8%) – 1 = 2.9%
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Top Down DDM Implied ERP – All Model Specifications
January 2014 – April 2021

Trailing 12M w/Adj Payout

8.5%

Trailing 12M w/Spot Payout

Trailing 12M w/10Yr Avg Payout
Norm Earnings (10Yr Avg) w/10Yr Avg Payout
Trailing 12M w/Adj 10Yr Avg Payout

7.5%

6.5%

5.5%

4.5%

3.5%

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Top Down DDM Implied ERP – MedianJanuary 2014 – April 2021

8.5%

7.5%

Median Implied ERP (DDM)

6.5%

6.0%
5.5%

4.5%

3.5%

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Duff & Phelps’ Recommended Eurozone Equity Risk Premium– German Investor Perspective applied to EUR-Denominated Projections *December 2019

March 2020

April 2021

2.0%

2.0%

2.0%

Eurozone Equity Risk Premium Recommendation

4.5% to 5.0%

5.5% to 6.0%

5.5% to 6.0%

Base Cost of Equity

6.5% to 7.0%

7.5% to 8.0%

7.5% to 8.0%

Normalized Risk-Free Rate – Germany* Some countries may have regulations or guidelines that preclude the use of normalized risk-free rates. The Duff & Phelps’ approach does not supersede such local guidance. In Germany, forinstance, the IDW (Institute of German Chartered Accountants) created a committee (FAUB) whose function is to issue guidance regarding (company) valuation topics. Under FAUB guidance,
when estimating cost of capital using CAPM, a spot risk-free rate (Svensson method) should be used, while the ERP will change over time to reflect changes in the risk aversion.

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Inferred ERP: Using the D&P Eurozone Recommended ERP Against A Spot
German Risk-free Rate
As of April 30, 2021

20-Year German
Government
Spot Yield *Inferred Eurozone
ERP

Low
Range

GermanNormalized
Risk-free Rate

5.5%

+

2.0%

–

0.2%

=

7.3%

High
Range

Duff & Phelps
Eurozone
Recommended ERP

6.0%

+

2.0%

–

0.2%

=

7.8%

* Source: Deutsche Bundesbank
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06

Industry Betas

COVID-19 Impact on Industry Betas
OLS Betas by Industry Before and During COVID-19 Recovery
Pre COVID-19 Beta
As of 12/31/19

COVID-19 Beta
As of 12/31/20

Difference

Telecommunications

0.99

0.66

-0.33

Pharmaceuticals

1.12

0.95

-0.16

Software

1.05

1.00

-0.04

Food, Beverage, and Tobacco

0.72

0.75

0.04

Insurance

0.71

0.81

0.11

Banks

0.86

0.99

0.13

Automobiles

1.45

1.78

0.33

Energy

1.27

1.67

0.40

Retail

0.83

1.56

0.73

Industry

Source: Based on the median OLS (raw) betas by industry from the Cost of Capital Navigator’s U.S. Industry Benchmarking Module. The summary above is based on USD-denominated returns ofcompanies in United States as of December 31, 2019 and December 31, 2020.

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07

Country Risk

Global Risk – Country Heat Map
International Cost of Capital Module
Data as of December 31, 2020

Very High Risk
High Risk
Medium Risk
Low Risk
Very Low Risk
Data Not Available

International Cost of Capital Module | dpcostofcapital.com/international-cost-of-capital
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Country Risk Premia Pre-and Post COVID-19
Developed, Emerging and Frontier Markets
Country Yield Spread Model from a United States (USD) investor perspective** Based on the median country risk premia of countries classified by MSCI as developed, emerging, and frontier markets. MSCI only classifies
71 countries under these three categories.

Frontier Markets
7%

6.5%

6%
5%

4.5%

4%

4.3%

Emerging Markets
3.1%

3%

2.7%

2.6%
2.0%

2%
Developed Markets

1.9%

1.8%
1.5%

1.2%

1.2%

1%
0.3% 0.4% 0.2% 0.2%

0.1% 0.1%

0%
Dec Mar Jun Sep Dec Mar
2019 2020 2020 2020 2020 2021

Dec Mar Jun Sep Dec Mar
2019 2020 2020 2020 2020 2021

International Cost of Capital Module | dpcostofcapital.com/international-cost-of-capital
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Dec Mar Jun Sep Dec Mar
2019 2020 2020 2020 2020 2021
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Country Risk Premia Pre-and Post COVID-19
by Geographic Region

Country Yield Spread Model from a United States (USD) investor perspective** Based on the median country risk premia within each geographic region as classified by Euromoney. In total, it captures 175+ countries.

Africa

11.0%

10.0%

10.0%
9.0%
8.0%
7.0%

Middle East
Latin America andCaribbean

7.7% 7.8%
6.5%
6.1%

6.4%

6.0%
4.0%

3.0%

3.4% 3.2%
2.9%

2.0%
1.0%

5.5% 5.5%

5.0%

4.7%
4.3%

5.0%

7.6%

4.1%

4.6%4.4%

Asia Pacific
4.7%
3.1%
2.8%

Europe1.8%
1.4% 1.1%
1.0% 0.8%
0.6%

1.5%

1.9% 1.7%

0.0%International Cost of Capital Module | dpcostofcapital.com/international-cost-of-capital
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Takeaways of Today’s Presentation

COVID-19 profoundly changed key value drivers:• Projected Growth Rates• 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 historically low in the medium term, due to Central
Banks actions (despite recent increases due to some inflationary pressures)
Equity Risk Premium is cyclical• Historical measures are countercyclical and used without further adjustments may lead to the wrong conclusion
Betas for certain industries may be distorted
Country Risk changes over time to reflect current economic and market conditions

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66

For more information, please contact:
CARLA S. NUNES, CFA

JAMES HARRINGTONManaging Director – Valuation Digital Solutions
Duff & Phelps, A Kroll Business
E: Carla.nunes@duffandphelps.com

Director – Valuation Digital Solutions
Duff & Phelps, A Kroll Business
E: james.harrington@duffandphelps.com

About Duff & Phelps , A Kroll Busine s s
For nearly 100 years, Duff & Phelps has helped clients make confident decisions in the areas of valuation, real estate, taxation and transfer pricing, disputes, M&A advisory and other corporate transactions. For more
information, visit www.duffandphelps.com.

Abo ut Kroll
Kroll is the world’s premier provider of services and digital products related to governance, risk and transparency. We work with clients across diverse sectors in the areas of valuation, expert services, investigations,cyber security, corporate finance, restructuring, legal and business solutions, data analytics and regulatory compliance. Our firm has nearly 5,000 professionals in 30 countries and territories around the world. For
more information, visit www.kroll.com.
M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps
Securities, LLC. M&A advisory, capital raising and secondary market advisory services in the United Kingdom are provided by Duff & Phelps Securities Ltd. (DPSL), which is authorized and regulated by the Financial
Conduct Authority. Valuation Advisory Services in India are provided by Duff & Phelps India Private Limited under a category 1 merchant banker license issued by the Securities and Exchange Board of India.
© 2021 Duff & Phelps, LLC. All rights reserved. Kroll is a trade name for Duff & Phelps, LLC and its affiliates.

08

Extra Resources

Coronavirus Relief Packages
Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020
• Signed into law on March 6, 2020
• Size = $8.3 billion
Families First Coronavirus Response Act• Signed into law on March 18, 2020
• Size = approximately $200 billion
Coronavirus Aid, Relief, and Economic Security (CARES) Act• Signed into law on March 27, 2020
• Size = $2.2 trillion
Paycheck Protection Program and Health Care Enhancement Act• Signed into law on April 24, 2020
• Size = $484 billion
Consolidated Appropriations Act, 2021
• Signed into law on December 27, 2020
• Size = approximately $900 billion (the portion related to COVID-19 relief)
American Rescue Plan Act of 2021
• Signed into law on March 11, 2021
• Size = $1.9 trillion
Sources:
https://www.ama-assn.org/delivering-care/public-health/summary-paycheck-protection-program-and-health-care-enhancement-act
https://www.usatoday.com/in-depth/news/2021/03/11/covid-19-stimulus-how-much-do-coronavirus-relief-bills-cost/4602942001/
Private and Confidential

April 29, 2021

May 20, 2021

69

Risk-Free Rate Normalization – United Kingdom
As of April 30, 2021

0.0%

2.3%

Long-term Real Rate

+
1.6%

+
2.2%

Long-term Expected Inflation

=
1.6%

=
Long-term Normalized Risk-Free Rate

4.5%

•

Fisher Equation: Midpoint = 3.1% / Median = 3.1%•

LT Average: 10-Year Trailing Average of 20-Year U.K. Government Yield = 2.2%

Concluded Normalized Rf = 2.5%
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Risk-Free Rate Normalization – Canada
As of April 30, 2021

-0.3%

2.0%

Long-term Real Rate

+
1.7%

+
2.2%

Long-term Expected Inflation

=
1.5%*

=
Long-term Normalized Risk-Free Rate

4.2%

•

Fisher Equation: Midpoint = 2.8% / Median = 3.0%•

LT Average: 10-Year Trailing Average of Canada Benchmark Bond Yields- Long Term = 2.2%

Concluded Normalized Rf = 2.5%
* Differences due to rounding.

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Cost of Capital Navigator
ABOUT THE COST OF CAPITAL NAVIGATORThe Cost of Capital Navigatoris an online platform that guides you
through the process of developing global
cost of capital estimates, a key componentof any valuation analysis. The four Modules
are available for 1-year subscriptions.
•

U.S. Cost of Capital•

U.S. Industry Benchmarking•

International Cost of Capital•International Industry Benchmarking

Cost of Capital Navigator | dpcostofcapital.com
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Cost of Capital Navigator
AVAILABLE MODULES

U.S.
COST OF CAPITAL

U.S. INDUSTRYBENCHMARKINGINTERNATIONALCOST OF CAPITALINTERNATIONAL
INDUSTRY
BENCHMARKING

Provides size premia, risk
premia, equity risk
premia, risk-free rates,
betas and industry risk
premia that can be used
to estimate U.S. cost ofcapital.

Provides U.S. industrylevel inputs needed toestimate cost of capitaland industry-level
benchmarks that can beused to augment andsupport custom analyses.

Provides country risk
premia, relative volatility
factors, equity risk premia
and international industry
betas that can be used toestimate cost of capital
globally.

Provides global industrylevel inputs needed toestimate cost of capitaland global industry-level
benchmarks that can beused to augment andsupport custom analyses.

Released in 2018

Released in 2019

Released in 2020

Released in 2021

Cost of Capital Navigator | dpcostofcapital.com
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