The just released Duff & Phelps, LLC Risk Premium Report 2009 provides updated risk premium data based on average returns through December 31, 2008. As in prior years, the Report presents information on rates of return related to company size and fundamental company risk. The size portion details findings categorized by two market-value-based measures and six “fundamental” or accounting-based measures. The risk portion analyzes data against the three fundamental measures of business risk—operating margin, variability of operating margin, and variability of return on invested capital.

New this year are the size measures of the companies comprising the portfolio of the smallest companies (25th portfolio). This data will assist users in determining the appropriateness of extrapolating the return data to small companies.

The 2009 Report also shows that the historical equity risk premiums (ERP) over long-term risk-free rates for the measures of 5-Year Average Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Net Income have decreased in 2008 as compared to the previous year’s report, as shown below: 

The new historical equity risk premiums, including the additional measures of Sales and Total Assets, can also be found in Business Valuation Update™ in its monthly “Cost of Capital” feature. The entire 2009 Report is now available through BVResources.

For more on why and how to use the Risk Premium Report in today’s environment, download Duff & Phelps Managing Director Roger Grabowski’s discussion of how the current economic environment has created problems with the traditional methods we employ for estimating discount rates for equity capital (expected return or required rate of return on equity capital).