“Normalizing interest rates are becoming routine for many business valuation professionals when developing a discount rate in the current environment and as part of a World War II [equity risk premium] adjustment,” says a new article by Kevin Piccolo and Mike Barad (both Morningstar) titled “The Dangers of Normalization: An Interest Rate Perspective.” In a video interview, the authors discuss the highlights of their article, including:
- What analysts may not know about the WWII ERP adjustment relative to other historical periods;
- Uncovering the WWII interest rate ceiling and its impact;
- The questions to ask before making the WWII ERP adjustment; and
- Pitfalls of normalizing interest rates in the current economic environment.
The video also includes brief commentary by Roger Grabowski (Duff & Phelps) and Aswath Damodaran (NYU Stern School of Business).
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