Mon, Jan 3, 2011

2011 Duff & Phelps Risk Premium Report

We are pleased to announce the publication of the 2011 Kroll Risk Premium Report. Now in its 16th year of publication, the Risk Premium Report continues to be at the forefront in providing comprehensive valuation methodology and data. [1,2]

The 2011 Duff & Phelps Risk Premium Report includes data available through December 31, 2010, and should be used for calendar year 2011 valuations (1996-2010 versions of the Report are available through our Distributors, as listed below).

Who Should Use the Duff & Phelps Risk Premium Report

The Risk Premium Report is designed to assist financial professionals in estimating the cost of equity capital ("cost of equity", or "COE") for a subject company. The risk premia calculated in the Report can be used to develop levered and unlevered COE estimates using both the build-up method and the Capital Asset Pricing Model (CAPM).

In addition to the traditional professional valuation practitioner, the Risk Premium Report, and the accompanying web-based Risk Premium Calculator (more information below), are designed to serve the needs of:

  • Corporate finance officers for pricing or evaluating mergers and acquisitions, raising private or public equity, property taxation, and stakeholder disputes.
  • Investment bankers for pricing public offerings, mergers and acquisitions, and private equity financing.
  • CPAs who deal with either valuation for financial reporting or client valuations issues.
  • Judges and attorneys who deal with valuation issues in mergers and acquisitions, shareholder and partner disputes, damage cases, solvency cases, bankruptcy reorganizations, property taxes, rate setting, transfer pricing, and financial reporting.

The Risk Premium Report features three studies that analyze returns based on company size and upon fundamental company risk:

  • Size Study: Analyzes the relationship between equity returns and company size, using up to eight measures of company size (i.e. "size measures").
  • Risk Study: Analyzes the relationship between equity returns and accounting-based fundamental risk measures.
  • High-Financial-Risk Study: Analyzes the relationship between equity returns and high-financial-risk, as measured by the Altman z-Score.

New In 2011: The Duff & Phelps Risk Premium Calculator (Online!)

In 2011 we introduce the web-based Duff & Phelps Risk Premium Calculator. The Calculator automatically estimates levered and unlevered cost of equity capital (COE) for your subject company dependent on its size and risk characteristics (for any valuation date from January 1, 1996 to present), using both the capital asset pricing model (CAPM) and buildup models.

The Calculator employs the same trusted methodology and data published in the Duff & Phelps Risk Premium Report, which has provided financial and valuation professionals defensible cost of capital data and methodology since 1996. 3

The Calculator is easy to use, saves time, and automatically provides full summary output in both Microsoft Word and Microsoft Excel format. In addition, the Calculator automatically looks up the long-term risk free rate for your valuation date 4, automatically makes the important (but often overlooked) "ERP Adjustment" to your subject company's COE estimates, and automatically adjusts an SBBI industry risk premium (IRP) so that it can be used in a Buildup model using Risk Premium Report size premia. 5

Publication / Purchasing Information

Published by:
Duff & Phelps, LLC
311 South Wacker Drive
Suite 4200
Chicago, IL 60606
+1 312 697 4600  

The 2011 Duff & Phelps Risk Premium Report may be purchased from our Distributors (Note: Calculator available exclusively through BVR):

Business Valuation Resources (BVR) | | +1 888 287 8258

Morningstar | | +1 888 298 3647

ValuSource | 888 825 8763

The Duff & Phelps Risk Premium Report is intended to be used as a companion publication to the web-based Duff & Phelps Risk Premium Calculator. Exclusive distribution for the Calculator is through Business Valuation Resources (BVR).

1.The Duff & Phelps Risk Premium Report is based on a series of articles published by Roger Grabowski and David King, culminating with a seminal 1996 article and a subsequent article in 1999 which together served as the Report's foundation. See: Roger J. Grabowski and David King, "New Evidence on Size Effects and Equity Returns", Business Valuation Review (September 1996, revised March 2000), & Roger J. Grabowski and David King, "New Evidence on Equity Returns and Company Risk", Business Valuation Review (September 1999, revised March 2000).

2.Published as the Standard & Poor's Corporate Value Consulting Risk Premium Report for reports titled 2002 to 2004 and as the PricewaterhouseCoopers Risk Premium Report and the Price Waterhouse Risk Premium Report for reports titled before 2002.

3.For detailed discussion of cost of capital issues, see Cost of Capital: Applications and Examples 4th ed. by Shannon Pratt and Roger Grabowski, Wiley (2010).

4.20-year constant maturity Treasury bond yield as of your valuation data. Source: The Board of Governors of the Federal Reserve System.

5.Duff & Phelps does not publish IRPs. A source of IRPs is Morningstar's Ibbotson SBBI Valuation Yearbook, (Chicago, Morningstar), Chapter 3, "The Buildup Method", Table 3-5.

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