This past July, Duff & Phelps presented a webcast on the impact of the Brexit vote on cost of capital. The firm has released a report that summarizes the issues discussed during the webcast and provides updates to some of the data presented. The report also discusses some recent economic and financial market developments that are relevant to the matter.
The speakers on the webcast included Aswath Damodaran (New York University Stern School of Business), Elroy Dimson (Judge Business School, University of Cambridge), Pablo Fernández (University of Navarra—IESE Business School in Spain), Roger J. Grabowski (Duff & Phelps), and Yann Magnan (Duff & Phelps). One message all of the speakers stressed is to maintain internal consistency between the elements of cost of capital and the current economic environment. Also, you need to consider that there may be a “new normal,” i.e., lower interest rates, higher risk premiums and slower growth. As for the equity risk premium (ERP), the D&P report recommended that ERP as of Jan. 31, 2016 (5.5%) should continue to be used, as the risks associated with Brexit did not warrant a change.
Postscript: In looking at recent developments in terms of the economy and equity markets, the report points out that there have been conflicting reports as to the effects of Brexit. Some reports suggest that the negative impact was temporary because the markets have bounced back. Others believe the recent recovery does not guarantee that there will be no negative short-term impact. “The reality is that it is still too early to ascertain what the ultimate impact will be to the U.K. economy,” the report says. In terms of interest rates, measures taken by the Bank of England have kept interest rates at historical lows, as was expected.
In light of recent developments, the financial markets will continue to be distorted “for the foreseeable future.” That means that you need to consider whether to adjust expected cash flows and discount rates when doing valuations—and make sure you’re internally consistent.
You can listen to a complimentary replay of the webcast if you click here.
The Duff & Phelps Valuation Handbook series includes the 2016 International Valuation Handbook – Guide to Cost of Capital and its companion volume that focuses on specific industries, the 2016 International Valuation Handbook – Industry Cost of Capital.
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