2016 Valuation Handbook
Guide to Cost of Capital
Published on 11. April 2016
Book
Hardback
384 pages
978-1-119-10976-1 (ISBN)
Description
The New Industry Standard in Business Valuation Reference Materials
2016 Valuation Handbook - Guide to Cost of Capital provides the key annual valuation data previously published in (i) the now discontinued Morningstar/Ibbotson
SBBI Valuation Yearbook (discontinued in 2013), and (ii) the Duff & Phelps
Risk Premium Report (no longer published as a stand-alone publication).
The size premia data previously published in the
SBBI Valuation Yearbook is referred to as the "CRSP Deciles Size Premia" exhibits in the new
2016 Valuation Handbook - Guide to Cost of Capital, while the size and risk premia data published in the Duff & Phelps
Risk Premium Report has been published annually since 1996 and, like the former
SBBI Valuation Yearbook, provides data and methodology that can be used to develop cost of equity capital estimates using (i) the build-up method and (ii) the capital asset pricing model (CAPM).
The
2016 Valuation Handbook includes data through December 31, 2015, and is intended to be used for 2016 valuation dates.
For more information about Duff & Phelps valuation data resources published by Wiley, please visit www.wiley.com/go/valuationhandbooks.
Also Available
2016 Valuation Handbook - Industry Cost of Capital
2016 International Valuation Handbook - Guide to Cost of Capital
2016 International Valuation Handbook - Industry Cost of Capital
Key Features
Key cost of capital outputs: The 2016 Valuation Handbook provides the key inputs needed for developing the cost of equity capital (i.e., "discount rate") for use in estimating the value of a subject business, business ownership interest, security, or intangible asset. Inputs provided include: equity risk premia, size premia, risk premia over the risk free rate, full-information industry betas, industry risk premia, and risk-free yields.
Discussion of topics that come up most when performing valuation analysis: The 2016 Valuation Handbook includes straightforward discussions about: (i) valuation theory, (ii) the differences between the various cost of capital estimation models (build-up, CAPM, Fama-French), (iii) understanding the basic building blocks of cost of equity capital (the risk-free rate, the equity risk premium, the size premium, beta, the industry risk premium, the company-specific risk premium), (iv) whether to "normalize" risk-free rates or not, (v) a detailed comparison of the CRSP Deciles Size Premia Study (this is the former SBBI Valuation Yearbook data) and the Risk Premium Report Study, and more.
Easy-to-follow examples: The 2016 Valuation Handbook is packed with easy-to-understand examples for properly using the data to develop levered, unlevered, and even "high-financial-risk" cost of equity capital using various build-up methods and the CAPM.
2016 Valuation Handbook - Guide to Cost of Capital provides the key annual valuation data previously published in (i) the now discontinued Morningstar/Ibbotson
SBBI Valuation Yearbook (discontinued in 2013), and (ii) the Duff & Phelps
Risk Premium Report (no longer published as a stand-alone publication).
The size premia data previously published in the
SBBI Valuation Yearbook is referred to as the "CRSP Deciles Size Premia" exhibits in the new
2016 Valuation Handbook - Guide to Cost of Capital, while the size and risk premia data published in the Duff & Phelps
Risk Premium Report has been published annually since 1996 and, like the former
SBBI Valuation Yearbook, provides data and methodology that can be used to develop cost of equity capital estimates using (i) the build-up method and (ii) the capital asset pricing model (CAPM).
The
2016 Valuation Handbook includes data through December 31, 2015, and is intended to be used for 2016 valuation dates.
For more information about Duff & Phelps valuation data resources published by Wiley, please visit www.wiley.com/go/valuationhandbooks.
Also Available
2016 Valuation Handbook - Industry Cost of Capital
2016 International Valuation Handbook - Guide to Cost of Capital
2016 International Valuation Handbook - Industry Cost of Capital
Key Features
Key cost of capital outputs: The 2016 Valuation Handbook provides the key inputs needed for developing the cost of equity capital (i.e., "discount rate") for use in estimating the value of a subject business, business ownership interest, security, or intangible asset. Inputs provided include: equity risk premia, size premia, risk premia over the risk free rate, full-information industry betas, industry risk premia, and risk-free yields.
Discussion of topics that come up most when performing valuation analysis: The 2016 Valuation Handbook includes straightforward discussions about: (i) valuation theory, (ii) the differences between the various cost of capital estimation models (build-up, CAPM, Fama-French), (iii) understanding the basic building blocks of cost of equity capital (the risk-free rate, the equity risk premium, the size premium, beta, the industry risk premium, the company-specific risk premium), (iv) whether to "normalize" risk-free rates or not, (v) a detailed comparison of the CRSP Deciles Size Premia Study (this is the former SBBI Valuation Yearbook data) and the Risk Premium Report Study, and more.
Easy-to-follow examples: The 2016 Valuation Handbook is packed with easy-to-understand examples for properly using the data to develop levered, unlevered, and even "high-financial-risk" cost of equity capital using various build-up methods and the CAPM.
More details
Series
Language
English
Place of publication
New York
United States
Target group
Professional and scholarly
Dimensions
Height: 285 mm
Width: 222 mm
Thickness: 33 mm
Weight
1522 gr
ISBN-13
978-1-119-10976-1 (9781119109761)
Copyright in bibliographic data and cover images is held by Nielsen Book Services Limited or by the publishers or by their respective licensors: all rights reserved.
Schweitzer Classification
Other editions
New editions
Roger J. Grabowski | Carla Nunes | James P. Harrington
2017 Valuation Handbook - U.S. Guide to Cost of Capital
Book
04/2017
1st Edition
Wiley
€271.50
Shipment within 15-20 days
Persons
Roger J. Grabowski, Managing Director of Duff & Phelps LLC, is a major speaker at conferences and has testified in court as an expert witness on the value of closely held businesses and business interests, matters of solvency, valuation and amortization of intangible assets and other valuation issues. He testified in the Northern Trust case, the first U.S. Tax Court decision that adopted the discounted cash flow method to value the stock of a closely-held business with the discount rate based on the capital asset pricing model.
James P. Harrington, Director in the Office of Professional Practice at Duff & Phelps, is an accomplished financial writer and analyst. He provides technical support on client engagements involving cost of capital and business valuation matters, and leads efforts for development of Duff & Phelps? studies, surveys, online content and tools, and internal models. He is also the co-developer of the online Duff & Phelps Risk Premium Calculator, which is based on the data and methodology of the Duff & Phelps Risk Premium Report.
Carla Nunes, Director in the Office of Professional Practice of Duff & Phelps LLC, provides firmwide technical guidance on a variety of valuation, financial and tax reporting issues. She has directed multiple valuation assignments for a wide range of industries, including pharmaceutical, biotechnology, healthcare and specialty chemicals.
James P. Harrington, Director in the Office of Professional Practice at Duff & Phelps, is an accomplished financial writer and analyst. He provides technical support on client engagements involving cost of capital and business valuation matters, and leads efforts for development of Duff & Phelps? studies, surveys, online content and tools, and internal models. He is also the co-developer of the online Duff & Phelps Risk Premium Calculator, which is based on the data and methodology of the Duff & Phelps Risk Premium Report.
Carla Nunes, Director in the Office of Professional Practice of Duff & Phelps LLC, provides firmwide technical guidance on a variety of valuation, financial and tax reporting issues. She has directed multiple valuation assignments for a wide range of industries, including pharmaceutical, biotechnology, healthcare and specialty chemicals.
Content
Acknowledgements xi
Introduction xii
Chapter 1 Cost of Capital Defined 1-1
Introduction 1-1
Income Approach Overview 1-2
Discounting versus Capitalizing Concepts 1-2
Valuation Date 1-5
Basic Cost of Capital Concepts 1-5
Sources of Capital 1-9
Cost of Capital Input Assumptions 1-10
Capital Structure Considerations 1-16
Calculating WACC 1-17
Estimates of Cost of Capital are Imprecise 1-19
Key Things to Remember about Cost of Capital 1-20
Chapter 2 Methods for Estimating the Cost of Equity Capital 2-1
Basic Framework 2-1
Types of Risk 2-6
Cost of Equity Capital Estimation Methods 2-8
Build-up 2-10
CAPM 2-11
Other Cost of Equity Capital Estimation Methods 2-15
Key Things to Remember about the Methods for Estimating the Cost of Equity Capital 2-16
Chapter 3 Basic Building Blocks of the Cost of Equity Capital ? Risk-free Rate and Equity Risk Premium 3-1
The Risk-free Rate and Equity Risk Premium: Interrelated Concepts 3-1
Spot Risk-free Rates versus Normalized Risk-free Rates 3-2
Methods of Risk-free Rate Normalization 3-15
Spot Yield or Normalized Yield? 3-18
Equity Risk Premium 3-20
Estimating the Equity Risk Premium 3-21
Duff & Phelps Recommended ERP 3-33
Concluding on an ERP 3-39
Chapter 4 Basic Building Blocks of the Cost of Equity Capital ? Size Premium 4-1
Size as a Predictor of Equity Returns 4-1
Possible Explanations for the Greater Returns of Smaller Companies 4-2
The Size Effect: Empirical Evidence 4-2
The Size Effect Over Longer Periods 4-3
The Size Effect Tends to Stabilize Over Time 4-6
The Size Effect Changes Over Time 4-7
Criticisms of the Size Effect 4-8
Data Issues 4-12
Has the Size Effect Disappeared in More Recent Periods? 4-17
Relationship of Size and Liquidity 4-21
Key Things to Remember about the Size Premium 4-26
Chapter 5 Basic Building Blocks of the Cost of Equity Capital ? Betas and Industry Risk Premia 5-1
Beta 5-1
Differences in Estimation of Equity Betas 5-7
Full-Information Beta 5-11
Industry Risk Premia 5-12
Full-Information Beta Methodology 5-16
Debt Betas 5-17
Unlevering and Levering Equity Betas 5-18
Key Things to Remember about Betas and the Industry Risk Premia 5-19
Chapter 6 Basic Building Blocks of the Cost of Equity Capital ? Company-specific Risk Premia 6-1
Introduction 6-1
Adjustments for Differences in Risk 6-2
Adjustments for Risk in Net Cash Flows and Biased Projections 6-5
Adjustments for Other Risk Factors 6-7
Matching Fundamental Risk and Return 6-8
Key Things to Remember about Company-specific Risk Premia 6-10
Chapter 7 The CRSP Deciles Size Premia Studies and the Risk Premium Report Studies ? A Comparison 7-1
History of the CRSP Deciles Size Premia Studies 7-1
History of the Risk Premium Report Studies 7-2
Data Sources 7-2
Definitions of ?Size? 7-6
Time Period Examined 7-6
Number of Portfolios 7-7
Portfolio Overlap 7-7
Guideline Portfolio Method and Regression Equation Method 7-8
Risk Premia Over CAPM (Size Premia) 7-8
?Smoothed? Premia versus ?Average? Premia 7-12
OLS Beta versus Sum Beta 7-12
Risk Premia Over the Risk Free Rate 7-12
Unlevered Premia 7-13
Risk Study 7-13
Characteristics of Companies in Portfolios 7-13
Online Applications 7-14
Chapter 8 CRSP Deciles Size Premia Examples 8-1
Build-up Example 8-1
CAPM Example 8-4
Key Things to Remember about the CRSP Deciles Size Premia 8-7
Chapter 9 Risk Premium Report Exhibits ? General Information 9-1
Appropriate Use of the Risk Premium Report Exhibits 9-1
How the Risk Premium Report Exhibits are Organized 9-1
Cost of Equity Capital Estimation Methods Available 9-3
Proper Application of the Equity Risk Premium (ERP) Adjustment 9-4
?Smoothed? Premia versus ?Average? Premia 9-7
The ?Guideline Portfolio Method? versus the ?Regression Equation Method? 9-8
Example: Calculating an Interpolated Premium Using the Regression Equation Method 9-9
Tips Regarding the Regression Equation Method 9-10
Can the Regression Equation Method be Used if the Subject Company is Small? 9-10
Size Study or Risk Study? 9-11
Key Things to Remember About the Risk Premium Report Exhibits 9-12
Chapter 10 Risk Premium Report Exhibits ? Examples 10-1
Size Study 10-1
Reasons for Using Additional Measures of Size 10-1
The Difference Between the Size Study?s A Exhibits and the B Exhibits 10-2
The Difference Between ?Risk Premia Over the Risk-free Rate? and ?Risk Premia Over CAPM? 10-2
Calculating Custom Interpolated Premia for Smaller Companies 10-6
Overview of Methods Used to Estimate Cost of Equity Capital Using the Size Study 10-9
Size Study Examples: Assumptions Used 10-10
Size Study Examples 10-12
Unlevered Cost of Equity Capital 10-17
Overview of the Methodology and Assumptions Used to Unlever Risk Premia 10-18
Estimating Cost of Equity Capital Using the ?Build-up 1-Unlevered? Method 10-22
Estimating Cost of Equity Capital Using the Capital Asset Pricing Model (CAPM) 10-26
Estimating Cost of Equity Capital Using the ?Build-up 2? Method 10-30
Risk Study 10-35
Overview of Methods Used to Estimate Cost of Equity Capital Using the Risk Study 10-42
Risk Study Examples 10-45
Build-up 3-Unlevered 10-49
High-Financial-Risk Study 10-51
Overview of Methods Used to Estimate Cost of Equity Capital Using the High-Financial-Risk Study 10-57
Estimating Cost of Equity Capital Using the ?Build-up 1-High-Financial-Risk? Method 10-58
Estimating Cost of Equity Capital Using the ?CAPM-High-Financial-Risk? Method 10-61
Comparative Risk Study 10-63
Using the Comparative Risk Study to Refine Build-up Method Estimates 10-67
Using the Comparative Risk Study to Refine CAPM Estimates 10-69
Chapter 11 Real Estate 11-1
Individual Real Estate Assets 11-1
Real Estate Investment Trusts (REITs) 11-2
Structure of Real Estate Entities 11-2
Correlation of U.S. REITs Compared to Other U.S. Asset Classes 11-3
Summary Statistics of U.S. REITs Compared to Other U.S. Asset Classes 11-5
Real Estate Property Valuation Inputs 11-8
Key Things to Remember about Real Property Valuation 11-16
Chapter 12 Answers to Commonly Asked Questions 12-1
Glossary
Index
Appendix 1 ? Definitions of Standard & Poor?s Compustat Data Items Used to Calculated the Risk Premium Report Exhibits
Appendix 2 ? Changes to the Risk Premium Report Over Time
Appendix 3 ? CRSP Deciles Size Premia Study: Key Variables
Appendix 3a ? Industry Risk Premium (RPi)
Appendix 3b ? Debt Betas
Appendix 4 ? Risk Premium Report Study Exhibits
Introduction xii
Chapter 1 Cost of Capital Defined 1-1
Introduction 1-1
Income Approach Overview 1-2
Discounting versus Capitalizing Concepts 1-2
Valuation Date 1-5
Basic Cost of Capital Concepts 1-5
Sources of Capital 1-9
Cost of Capital Input Assumptions 1-10
Capital Structure Considerations 1-16
Calculating WACC 1-17
Estimates of Cost of Capital are Imprecise 1-19
Key Things to Remember about Cost of Capital 1-20
Chapter 2 Methods for Estimating the Cost of Equity Capital 2-1
Basic Framework 2-1
Types of Risk 2-6
Cost of Equity Capital Estimation Methods 2-8
Build-up 2-10
CAPM 2-11
Other Cost of Equity Capital Estimation Methods 2-15
Key Things to Remember about the Methods for Estimating the Cost of Equity Capital 2-16
Chapter 3 Basic Building Blocks of the Cost of Equity Capital ? Risk-free Rate and Equity Risk Premium 3-1
The Risk-free Rate and Equity Risk Premium: Interrelated Concepts 3-1
Spot Risk-free Rates versus Normalized Risk-free Rates 3-2
Methods of Risk-free Rate Normalization 3-15
Spot Yield or Normalized Yield? 3-18
Equity Risk Premium 3-20
Estimating the Equity Risk Premium 3-21
Duff & Phelps Recommended ERP 3-33
Concluding on an ERP 3-39
Chapter 4 Basic Building Blocks of the Cost of Equity Capital ? Size Premium 4-1
Size as a Predictor of Equity Returns 4-1
Possible Explanations for the Greater Returns of Smaller Companies 4-2
The Size Effect: Empirical Evidence 4-2
The Size Effect Over Longer Periods 4-3
The Size Effect Tends to Stabilize Over Time 4-6
The Size Effect Changes Over Time 4-7
Criticisms of the Size Effect 4-8
Data Issues 4-12
Has the Size Effect Disappeared in More Recent Periods? 4-17
Relationship of Size and Liquidity 4-21
Key Things to Remember about the Size Premium 4-26
Chapter 5 Basic Building Blocks of the Cost of Equity Capital ? Betas and Industry Risk Premia 5-1
Beta 5-1
Differences in Estimation of Equity Betas 5-7
Full-Information Beta 5-11
Industry Risk Premia 5-12
Full-Information Beta Methodology 5-16
Debt Betas 5-17
Unlevering and Levering Equity Betas 5-18
Key Things to Remember about Betas and the Industry Risk Premia 5-19
Chapter 6 Basic Building Blocks of the Cost of Equity Capital ? Company-specific Risk Premia 6-1
Introduction 6-1
Adjustments for Differences in Risk 6-2
Adjustments for Risk in Net Cash Flows and Biased Projections 6-5
Adjustments for Other Risk Factors 6-7
Matching Fundamental Risk and Return 6-8
Key Things to Remember about Company-specific Risk Premia 6-10
Chapter 7 The CRSP Deciles Size Premia Studies and the Risk Premium Report Studies ? A Comparison 7-1
History of the CRSP Deciles Size Premia Studies 7-1
History of the Risk Premium Report Studies 7-2
Data Sources 7-2
Definitions of ?Size? 7-6
Time Period Examined 7-6
Number of Portfolios 7-7
Portfolio Overlap 7-7
Guideline Portfolio Method and Regression Equation Method 7-8
Risk Premia Over CAPM (Size Premia) 7-8
?Smoothed? Premia versus ?Average? Premia 7-12
OLS Beta versus Sum Beta 7-12
Risk Premia Over the Risk Free Rate 7-12
Unlevered Premia 7-13
Risk Study 7-13
Characteristics of Companies in Portfolios 7-13
Online Applications 7-14
Chapter 8 CRSP Deciles Size Premia Examples 8-1
Build-up Example 8-1
CAPM Example 8-4
Key Things to Remember about the CRSP Deciles Size Premia 8-7
Chapter 9 Risk Premium Report Exhibits ? General Information 9-1
Appropriate Use of the Risk Premium Report Exhibits 9-1
How the Risk Premium Report Exhibits are Organized 9-1
Cost of Equity Capital Estimation Methods Available 9-3
Proper Application of the Equity Risk Premium (ERP) Adjustment 9-4
?Smoothed? Premia versus ?Average? Premia 9-7
The ?Guideline Portfolio Method? versus the ?Regression Equation Method? 9-8
Example: Calculating an Interpolated Premium Using the Regression Equation Method 9-9
Tips Regarding the Regression Equation Method 9-10
Can the Regression Equation Method be Used if the Subject Company is Small? 9-10
Size Study or Risk Study? 9-11
Key Things to Remember About the Risk Premium Report Exhibits 9-12
Chapter 10 Risk Premium Report Exhibits ? Examples 10-1
Size Study 10-1
Reasons for Using Additional Measures of Size 10-1
The Difference Between the Size Study?s A Exhibits and the B Exhibits 10-2
The Difference Between ?Risk Premia Over the Risk-free Rate? and ?Risk Premia Over CAPM? 10-2
Calculating Custom Interpolated Premia for Smaller Companies 10-6
Overview of Methods Used to Estimate Cost of Equity Capital Using the Size Study 10-9
Size Study Examples: Assumptions Used 10-10
Size Study Examples 10-12
Unlevered Cost of Equity Capital 10-17
Overview of the Methodology and Assumptions Used to Unlever Risk Premia 10-18
Estimating Cost of Equity Capital Using the ?Build-up 1-Unlevered? Method 10-22
Estimating Cost of Equity Capital Using the Capital Asset Pricing Model (CAPM) 10-26
Estimating Cost of Equity Capital Using the ?Build-up 2? Method 10-30
Risk Study 10-35
Overview of Methods Used to Estimate Cost of Equity Capital Using the Risk Study 10-42
Risk Study Examples 10-45
Build-up 3-Unlevered 10-49
High-Financial-Risk Study 10-51
Overview of Methods Used to Estimate Cost of Equity Capital Using the High-Financial-Risk Study 10-57
Estimating Cost of Equity Capital Using the ?Build-up 1-High-Financial-Risk? Method 10-58
Estimating Cost of Equity Capital Using the ?CAPM-High-Financial-Risk? Method 10-61
Comparative Risk Study 10-63
Using the Comparative Risk Study to Refine Build-up Method Estimates 10-67
Using the Comparative Risk Study to Refine CAPM Estimates 10-69
Chapter 11 Real Estate 11-1
Individual Real Estate Assets 11-1
Real Estate Investment Trusts (REITs) 11-2
Structure of Real Estate Entities 11-2
Correlation of U.S. REITs Compared to Other U.S. Asset Classes 11-3
Summary Statistics of U.S. REITs Compared to Other U.S. Asset Classes 11-5
Real Estate Property Valuation Inputs 11-8
Key Things to Remember about Real Property Valuation 11-16
Chapter 12 Answers to Commonly Asked Questions 12-1
Glossary
Index
Appendix 1 ? Definitions of Standard & Poor?s Compustat Data Items Used to Calculated the Risk Premium Report Exhibits
Appendix 2 ? Changes to the Risk Premium Report Over Time
Appendix 3 ? CRSP Deciles Size Premia Study: Key Variables
Appendix 3a ? Industry Risk Premium (RPi)
Appendix 3b ? Debt Betas
Appendix 4 ? Risk Premium Report Study Exhibits