Duff & Phelps regularly reviews fluctuations in global economic and financial conditions that warrant periodic reassessments of the equity risk premium (ERP) used for developing discount rates. Based on current market conditions, Duff & Phelps has just increased its recommended U.S. ERP to 5.5% for use as of Jan. 31, 2016, and thereafter, until further guidance is issued. This implies a 9.5% (4.0% + 5.5%) “base” U.S. cost of equity capital estimate as of Jan. 31, 2016. The previous Duff & Phelps U.S. ERP recommendation was 5.0%, established as of Feb. 28, 2013. Both of these ERP estimates were measured relative to a normalized yield of 4.0% on 20-year U.S. Treasury bonds. To read the full D&P report, click here.
Note: For valuations performed as of Dec. 31, 2015, the Duff & Phelps U.S. ERP recommendation remained at 5.0%, matched with a normalized risk-free rate of 4.0%.
D&P is the author of The 2016 Valuation Handbook – Guide to Cost of Capital (now available), which includes both the ERP data available in the Duff & Phelps Risk Premium Report and picks up where the old SBBI Valuation Edition left off.