Fri, Mar 29, 2013

Duff & Phelps Decreases U.S. Equity Risk Premium Recommendation to 5.0% , Effective February 28, 2013

Based on current market conditions, Duff & Phelps is decreasing its U.S. Equity Risk Premium (ERP) recommendation from 5.5% to 5.0% when developing discount rates as of February 28, 2013 and thereafter until such time that evidence indicates equity risk in financial markets has materially changed and new guidance is issued. 

The ERP is a key input used to calculate the cost of capital within the context of the Capital Asset Pricing Model (CAPM) and other models. The ERP is used as a building block when estimating the cost of capital (i.e., “discount rate”, “expected return”, “required return”), and is an essential ingredient in any business valuation, project evaluation, and the overall pricing of risk. Duff & Phelps regularly reviews fluctuations in global economic and financial conditions that warrant periodic reassessments of the ERP.  

Duff & Phelps developed its current ERP recommendation in conjunction with a “normalized” 20-year yield on U.S. government bonds of 4.0% as a proxy for the risk-free rate (Rf) implying a 9.0% (4.0% + 5.0%) “base” U.S. cost of equity capital estimate at the end of February 2013. 

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