Duff & Phelps has decreased its U.S. normalized risk-free rate from 3.5% to 3.0% effective Sept. 30, 2019, the firm says in a statement. This new rate, used in conjunction with D&P’s equity risk premium of 5.5% (reaffirmed), implies a “base” U.S. cost of equity capital estimate of 8.5% (3.0% + 5.5%), the firm says.

Rates of choice: In a recent BVWire survey, most respondents say they use the spot yield on Treasury bonds for their risk-free rate when developing an estimate for the cost of capital. The majority (58%) use the 20-year spot yield, and the rest (9%) use the 10-year spot yield. A quarter of respondents use the D&P normalized risk-free rate, and the remainder use something different (e.g., a 30-year spot yield) or a custom rate. Most respondents who use the spot yields get their information right from the U.S. Treasury website.

The concept of normalizing the risk-free rate emerged around the time of the financial crisis and is generally based on historical rates. A number of thought leaders strongly disagree with the use of a normalized rate, such as Chris Mercer of Mercer Capital (see his post on this topic) and Professor Aswath Damodaran of the New York University Stern School of Business, who writes that “a valuation is an assessment of the future as of right now, and you have to use the current risk-free rate.”