D&P has increased its recommended U.S. equity risk premium (ERP) from 5.0% to 6.0% for use as of 25 March 2020. This new rate, used in conjunction with a normalised risk-free rate of 3.0% (reaffirmed), implies a ‘base’ U.S. cost of equity capital estimate of 9.0% (6.0% + 3.0%), according to Duff & Phelps’ client alert.
‘To be clear, this means that for critical quarter-end valuations dated 31 March 2020, the recommended ERP is 6.0%,’ the firm says. ‘However, several economic and financial risk factors that we evaluate were already present during the week of 9 March 2020.’
The increased ERP attempts to match market conditions in the US but should be an indicator in Britain where the FTSE’s risk has increased and prices have dropped, revenues have decreased or disappeared, and billions of pounds of value have been erased, as reported in BVWire.