Duff & Phelps “C” and “D” exhibits can help you measure your subject company’s risk

BVWireIssue #102-2
March 9, 2011

During last week’s BVU webinar Using the 2001 Duff & Phelps Report: Learn from the Master Roger Grabowski (Duff & Phelps) asked “is the Subject Company more or less risky than comparable size firms?”  To answer the question Grabowski reminded listeners to look at the C Exhibits in the Duff & Phelps Risk Premium Report. “They are to help you not be criticized that all you did was take the average.”

Stock market beta, price volatility, and accounting risk measures all confirm that smaller companies are inherently more risky, Roger says.  Duff & Phelps offers two additional ways to evaluate this risk.  First, there are 8 C Exhibits. C Exhibits statistics are calculated for portfolios grouped according to size and are averages since 1963. They show relationships between size and accounting risk measures.  On the other hand, Exhibits D reported statistics are calculated for portfolios grouped according to risk, independent of size, and are trailing 5-year averages. They are used to calculate “alternative” risk premium for the build-up method.

Grabowski also reminded listeners to check his article Problems with Cost of Capital Estimation in the Current Environment – Update which addresses how the current economic environment has created problems with the traditional methods we employ for estimating discount rates for equity capital.

To access the free webinar, click here.

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