Duff & Phelps regularly reviews fluctuations in global economic and financial market conditions that warrant periodic reassessments of the recommended Equity Risk Premium (ERP). Based upon current market conditions, Duff & Phelps recommends an increase in the U.S. ERP to 5.5% when developing discount rates as of January 31, 2016 and thereafter (until further guidance is issued). The prior Duff & Phelps recommended U.S. ERP was 5.0%, established as of February 28, 2013. Both of these ERP estimates were measured relative to a normalized yield of 4.0% on 20-year U.S. Treasury bonds. Click here to read the report.
Note that for valuations performed as of December 31, 2015, the Duff & Phelps U.S. ERP recommendation remained at 5.0%, matched with a normalized risk-free rate of 4.0%.
The ERP is a key input used to calculate the cost of equity capital within the context of the Capital Asset Pricing Model (CAPM) and other models. The ERP is used as a building block when estimating a company’s discount rate and is an essential ingredient of any business valuation.