Three times is the charm for market factors in cost of capital

BVWireIssue #105-3
June 15, 2011

Roger Grabowski (Duff & Phelps) believes that the market impact on cost of capital has now hit a “blip” for the third time in history (after November 2008 and May 2010).  “In May 2011, the risk-free rate as we generally calculate it [based on 20-year Treasuries] was influenced by major investors abandoning returns in favor of safety of principal,” Grabowski told NACVA/IBA attendees.  Hence, the risk-free rate component of the buildup and MCAPM methods, which attempts to account for inflation expectations, has been at the lowest number when the market has been “risky enough so that my mother calls every day to ask whether she should sell her stock.” Grabowski’s conclusion: “It’s still riskier than it was at the end of 2006.  So, you still have to adjust the market components of the buildup method.”
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