Comment on COE data sources survey

BVWireIssue #237-2
June 15, 2022

cost of capital
beta, cost of capital, risk analysis, Aswath Damodaran, company-specific risk premium (CSRP), industry analysis, cost of equity

In last week’s issue, we reported on a survey of the data sources analysts use to estimate the cost of equity (COE) (click here to see the news item). It triggered some comments from Peter J. Butler (Valtrend), who is the co-developer of the Butler Pinkerton Calculator, which offers empirical data for total cost of equity (TCOE) and company-specific risk premiums (CSRP).

“I am glad to see ‘Damodaran’s data and analyses’ used [cited by survey respondents] at 14% (mean) and 14% (median),” Butler says. “Presumably, his industrywide total beta (TB) calculations are included in the category, along with his calculations of the implied equity risk premium (ERP). I am one of the 14% who look at both his TB calculations and ERP, in addition to (no surprise) the Butler Pinkerton Calculator (BPC). Presumably, since the BPC has had subscribers since 2007, its respondents were captured in the ‘Other or none of the above’ category, at 8% (mean) and 7% (median).”

Butler continues: “For the last 15 years, I have successfully (and easily) used the BPC (with no successful challenges—Daubert or otherwise) for individual guidelines while knowing the pertinent industry TBs (from Damodaran calculations). After all, we call it ‘company-specific risk’ for a reason. Thus, I ‘know’ the industry from Damodaran, and I ‘know’ the best publicly traded ‘guidelines’ to assist with my subject company’s cost of equity. While selection of the overall COE is still qualitative in nature with the BPC, I do not feel like I am ‘flying blind’/completely guessing as to the company-specific risk or total cost of equity for my subject company as I would if I solely relied upon the other data sources, which capture publicly traded stock returns.”

He concludes: “In summary, if you are going to use beta, which everyone does in one form or another, it only makes sense to use TB, too, and get the full benefit of publicly traded stock returns to assist with the valuation of your privately held company.”

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