Inflation, volatility trigger increase in ERP, per Kroll

BVWireIssue #242-1
November 2, 2022

cost of capital
cost of capital, discount rate, private company valuation, risk analysis, cost of equity, equity risk premium (ERP)

Kroll has increased its recommended U.S. equity risk premium (ERP) from 5.5% to 6.0% when developing USD-denominated discount rates as of Oct. 18, 2022. This is matched with the higher of a normalized risk-free rate of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date if it is higher than 3.5%, Kroll says.

Big picture: “Starting in mid-January, as inflation continued to surprise with increasingly higher-than-expected readings reaching levels not seen in 30 to 40 years in some countries, global equity markets became more volatile,” says the firm in a recent update. “Investors have tried to ascertain the magnitude and speed at which central banks will raise interest rates, leading to a potential decrease in the value of companies in various industries due to an increase in discount rates.”

In the same update, Kroll issued its recommendations for Canada, the eurozone (from a German investor perspective), and the United Kingdom.

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