Which financial market and economic indicators did Duff & Phelps take into consideration when it arrives at its recommended U.S. equity risk premium and accompanying normalized risk-free rate? Take a look at its infographic that tracks the impacts of COVID-19 on a number of important macroeconomic and risk indicators. “The coronavirus (COVID-19) outbreak has generated an unprecedented reaction in both global financial markets and the economy, and the resulting uncertainty highlights significant challenges for estimating cost of capital inputs in the current environment,” the firm says.
Recently, Duff & Phelps decreased its recommended U.S. normalized risk-free rate from 3.0% to 2.5% for use as of June 30, 2020, according to a client alert. This new rate, used in conjunction with a (reaffirmed) recommended equity risk premium of 6.0%, implies a “base” U.S. cost of equity capital estimate of 8.5% (6.0% + 2.5%).
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