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2014 Valuation
Handbook—
Guide to Cost of
Capital
Roger Grabowski, FASA
Roger J. Grabowski, FASA, is a Managing Director at Duff & Phelps LLC. He was formerly Managing
Director of the Standard & Poor’s Corporate Value Consulting practice, a partner of
PricewaterhouseCoopers LLP and one of its predecessor firms, Price Waterhouse (where he founded
its U.S. Valuation Services practice and managed the real estate appraisal practice).
He has directed valuations of businesses, interests in businesses, intellectual property, intangible
assets, real property and machinery and equipment. Roger has testified in court as an expert witness
on matters of solvency, the value of closely held businesses and business interests, valuation and
amortization of intangible assets and other valuation issues. His testimony in U.S. District Court was
referenced in the U.S. Supreme Court opinion decided in his client’s favor in the landmark Newark
Morning Ledger case.
Roger is co-author with Shannon Pratt of Cost of Capital: Applications and Examples, 5th ed.
forthcoming in April 2014 (John Wiley & Sons, 2014); co-author with Shannon Pratt of The Lawyer’s
Guide to Cost of Capital forthcoming (ABA, 2014); co-author with Shannon Pratt of Cost of Capital:
Applications and Examples, 4th ed. and Cost of Capital in Litigation: Applications and Examples and
has been the author of the annual Duff & Phelps Risk Premium Report.
Roger teaches courses for the American Society of Appraisers including Cost of Capital, a course he
developed.
Morningstar announced in late September, 2013, that it will no longer publish the Ibbotson SBBI Valuation Yearbook and other valuation publications and products.
The SBBI Valuation Yearbook and other “Ibbotson” valuation products have been widely used and cited in valuation reports for nearly 15 years and are generally considered one of the essential tools needed in every practitioner’s toolbox.
Last year’s 2013 SBBI Valuation Yearbook (with data through Dec. 31, 2012) is Morningstar’s last SBBI Valuation Yearbook—Morningstar will not be publishing a 2014 version (with data through Dec. 31, 2013).
6 © 2014 National Association of Certified Valuators and Analysts
SBBI Classic Edition - continuing
Addition of size premia for CRSP standard market-
cap-weighted deciles 1-10 only
“Supply-Side” Equity Risk Premium
Classic Edition is an analysis of the relative
performance of various asset classes in the U.S.
and does not provide extensive valuation data or
methodology
7 © 2014 National Association of Certified Valuators and Analysts
SBBI Valuation Edition - discontinued
◦ Discontinued:
Breakout of the 10th decile into 10a and 10b
or 10w, 10x, 10y, and 10z
Industry Risk Premia for use in build-up
method
8 © 2014 National Association of Certified Valuators and Analysts
Discontinued
Cost of Capital Yearbook – industry cost of capital
info
Individual company beta (OLS, Peer group, Ibbotson
adjusted) and Fama-French factors
International reports
CCRC.com website
9 © 2014 National Association of Certified Valuators and Analysts
2014 Valuation Handbook
Includes all of the critical year-end data that was
previously available in the SBBI Valuation
Yearbook
Timed to provide users of SBBI valuation data with
a source of data to complete year-end valuations
without interruption.
10 © 2014 National Association of Certified Valuators and Analysts
Valuation Handbook will include two sets of valuation
data:
Data previously available in the SBBI Valuation
Yearbook; and
Data available in Duff & Phelps Risk Premium
Report.
11 © 2014 National Association of Certified Valuators and Analysts
2014 Valuation Handbook includes all of the “key variables in estimating the cost of capital” previously published in the user-friendly SBBI Yearbook’s “back page,” including:
Yields ◦ Long-term (20-year) U.S. Treasury Coupon Bond Yield as
of December 2013
Equity Risk Premium ◦ Long-horizon expected “historical” equity risk premium
(1926-2013)
◦ Long-horizon expected “supply side” equity risk premium (1926-2013)
12 © 2014 National Association of Certified Valuators and Analysts
Size Premia
◦ CRSP Mid-Cap, Low-Cap, and Micro-Cap size
premia
◦ CRSP Deciles 1 through 10 size premia
◦ Size premia for the breakdown of CRSP Decile 10
into 10a (and its subdeciles 10w and 10x) and 10b
(and its subdeciles 10y and 10z)
13 © 2014 National Association of Certified Valuators and Analysts
Industry Risk Premium
◦ Industry risk premia (IRPs) previously found in Table
3-5 in the SBBI Valuation Yearbook.
◦ An IRP is used solely within the context of a build-up
model. IRPs are a necessary cost of capital
ingredient for those practitioners who like to use a
build-up model in their valuation analysis (alone, or
in addition to CAPM).
14 © 2014 National Association of Certified Valuators and Analysts
Industry Risk Premium – expanded data
◦ Full-information beta by SIC code
◦ IRPs based on three estimates of ERP
Historical ERP (1926-2013)
Supply-side (1926-2013)
Duff & Phelps recommended ERP (conditional as of
January 1, 2014)
15 © 2014 National Association of Certified Valuators and Analysts
The same data sources used to produce the data
in the former SBBI Valuation Yearbook are used to
produce the new Valuation Handbook:
◦ The Center for Research in Security Prices (CRSP)
market-cap-based NYSE/AMEX/NASDAQ indices;
◦ Standard & Poor’s Research Insight database; and
◦ SBBI Series from Morningstar’s EnCorr database.
The same methodologies are used to produce the
new Valuation Handbook.
16 © 2014 National Association of Certified Valuators and Analysts
Risk Premium Report
Published annually since 1996 and, like the former
SBBI Yearbook, provides data and methodology to
assist financial professionals in estimating the cost
of equity capital for a subject company using
various build-up models and CAPM.
Will no longer be published as a stand-alone
publication.
All of its data will be included in the Valuation
Handbook.
17 © 2014 National Association of Certified Valuators and Analysts
Risk Premium Report includes
Size premia based on 8 size measures
◦ For build-up method
◦ For CAPM
Risk premia based on 3 measures of fundamental
risk
◦ For build-up
Relationship of size to other risk characteristics
Returns for high-financial-risk companies
18 © 2014 National Association of Certified Valuators and Analysts
2014 Valuation Handbook is designed to complement
and update analyses presented in the upcoming:
Cost of Capital: Applications and Examples 5th ed.
by Shannon P. Pratt and Roger J. Grabowski
Expected shipping date – mid-April 2014.
19 © 2014 National Association of Certified Valuators and Analysts
Table of Contents: Introduction Ch. 1 – Cost of Capital Defined Ch. 2 – Methods for Estimating the Cost of Equity Capital Ch. 3 – Basic Building Blocks of the Cost of Equity Capital – Risk-free
Rate & Equity Risk Premium Ch. 4 – Basic Building Blocks of the Cost of Equity Capital – Size
Premium Ch. 5 – Beta & Industry Risk Premia Ch. 6 – Company-specific Risk Premium Ch. 7 – The CRSP Decile Studies and the Risk Premium Report – A Comparison Ch. 8 – Using the CRSP Decile Size Premia Ch. 9 – Using the Risk Premium Report CRSP Decile Size Premia Data Exhibits Risk Premium Report Data Exhibits
20 © 2014 National Association of Certified Valuators and Analysts
2014 Valuation Handbook expected shipping date
– March 17
Everyone who pre-orders will receive via email:
“Key Year-end Data as of 12/31/13”
21 © 2014 National Association of Certified Valuators and Analysts
Yields
◦ Long-term (20-year) U.S. Treasury Coupon Bond
Yield as of December 2013
Equity Risk Premium
◦ Long-horizon expected “historical” equity risk
premium (1926-2013)
◦ Long-horizon expected “supply side” equity risk
premium (1926-2013)
◦ Duff & Phelps recommended conditional ERP
22 © 2014 National Association of Certified Valuators and Analysts
Size Premia
◦ CRSP Mid-Cap, Low-Cap, and Micro-Cap size
premia
◦ CRSP Deciles 1 through 10 size premia
◦ Size premia for the breakdown of CRSP Decile 10
into 10a (and its subdeciles 10w and 10x) and 10b
(and its subdeciles 10y and 10z)
23 © 2014 National Association of Certified Valuators and Analysts
The following exhibit summarizes the valuation
data and products that Morningstar is
discontinuing. This data had been provided in two
broad ways: (i) hardcover books and
downloadable PDF reports; and (ii) on the Cost of
Capital Resources website at
CCRC.Morningstar.com (Note: the CCRC website
was “switched off” on Dec. 31, 2013).
24 © 2014 National Association of Certified Valuators and Analysts
Hardcover Books and PDFs
(discontinued)
CCRC.Morningstar.com website
(discontinued)
Ibbotson SBBI Valuation Yearbook SBBI Valuation Essentials module*
Individual Company Betas
(in PDF format)
Company Betas module
(also sold seperately as PDF "tear" sheets)
Ibbotson Cost of Capital YearbookIndustry Analysis module**
(also sold seperately as PDF "tear" sheets)
International Cost of Capital Reports
(in PDF format)
Int'l Cost of Capital module
(also sold seperately as individual PDF reports)
• Int'l Cost of Capital Report
• Int'l Cost of Capital Perspective Report
• Int'l Equity Risk Premium Report
* These reports included the most "essential" information from each of the 1999–2013 SBBI
Valuation Yearbook (in PDF format).
** These reports were individual industry analysis pages from the Ibbotson Cost of Capital
Yearbook, over time (in PDF format).
25 © 2014 National Association of Certified Valuators and Analysts
Beta estimates
Industry
Individual company
If you use published betas like Capital IQ or Value
Line use same source for all companies
International cost of capital
Credit Suisse Global Investment Returns Sourcebook
– Dimson, Marsh & Staunton
Damodaran website
Campbell Harvey model
26 © 2014 National Association of Certified Valuators and Analysts
Updated Valuation Software – All three applications (BVM Pro, ValuSource Pro and EBV) will be updated to incorporate both datasets from the Valuation Handbook. This update will be free for existing version 5, 6 and 7 customers.
Valuation Handbook Purchase Options from NACVA & ValuSource: ◦ Book only ($225) ◦ Book + Web-based Data ($325) – This database contains all the
data elements as in the former SBBI Valuation Yearbook will be available to download into all the ValuSource valuation applications just like the SBBI Valuation Yearbook data was.
◦ Book + Web-based Data + Cost of Capital Analyzer ($519) – In addition to the web-based data, ValuSource will have a web based Analyzer that creates Cost of Equity reports from the Risk Premium Report data. These reports can be automatically downloaded in to ValuSource valuation applications or exported to Excel.
27 © 2014 National Association of Certified Valuators and Analysts