Wed, Jan 17, 2024

The New Normal: Cost of Capital in a Higher-Interest-Rate Environment

Kroll expert Carla Nunes, CFA, ABV spoke at the 2023 AICPA & CIMA Forensic & Valuation Services Conference in two separate sessions.

Kroll expert Carla Nunes, CFA, ABV, spoke at the 2023 AICPA & CIMA Forensic & Valuation Services Conference in two separate sessions. During the conference, Carla was interviewed by Nene Glenn Gianfala, CPA, ABV, ASA BV/IA, of Chaffe & Associates, Inc. about current economic conditions that impact valuations and the cost of capital. Carla provided an overview of current conditions and discussed projected economic growth. This was followed by a deep dive into the cost of capital and how individual inputs, including the risk-free rate, equity risk premium, betas and cost of debt, are impacted.

Cost of Capital Ramifications of the Russia-Ukraine War and Global Inflationary Pressures Podcast

The following are some highlights of the discussion:

  • 1:50—What are some of the global economic trends impacting valuations and cost of capital?
  • 5:00—There is so much information out there on historic and projected growth and where the economy is going. Which resources can valuation professionals use for the best information?
  • 7:08—What is the U.S. Federal Reserve going to do, and what is the outlook for interest rates and the associated impact on the risk-free rate?
  • 11:15–What is the outlook for the equity risk premium? Should we use historical realized ERPs as proxies for the future?
  • 16:26—Could Kroll recommend that the U.S. change ERPs in the near future?
  • 17:53—Some of the ERP models broke down during COVID-19. Why should you look at multiple models when arriving at your ERP estimate?
  • 21:20–Betas in some industries went up in the aftermath of COVID-19 while others went down. Are betas stabilizing now or will they go back to pre-pandemic levels? What were some of the most impacted industries?
  • 24:40–How is the cost of debt for individuals and businesses impacted by the current interest rate environment?
  • 29:50–Repercussions of higher cost of debt on M&A activity in the current environment and outlook for 2024.

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The Kroll Cost of Capital Navigator is an online platform that guides you through the process of estimating the cost of capital, a key component of any valuation analysis. You can subscribe to any or all four cost of capital modules, each offering three annual subscription levels–Basic, Pro and Enterprise. Additional products offered by Kroll include the annual Stocks, Bonds, Bills and Inflation® (SBBI®) Yearbook which provides historical U.S. capital markets data.

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