Should you normalize the risk-free rate?


It’s conference season, and BVWire has been listening to and talking with BV thought leaders about hot topics and current developments in the profession.

In a session at the ASA Advanced Business Valuation conference in San Antonio, Shannon Pratt (Shannon Pratt Valuations) and Roger Grabowski (Duff & Phelps) revealed some of what will be included in their new, fifth edition of Cost of Capital: Applications and Examples, which is the most comprehensive book on this subject. They pointed out that they have written this new edition as though they were “talking to the courts” about how this topic should be viewed and treated. It’s hard to believe they can improve on this book, but it appears that they have done just that. The new edition will have additional case studies and updated chapters on SFAS 141, 142, 144, distressed companies, convertible bonds, and hybrid instruments.

Fresh look: They’ve also added a full chapter on the risk-free rate. Based on their research, valuation experts should rethink their position about normalizing this rate. Most analysts do not do this, but, after listening to Pratt and Grabowski, conference attendees and speakers agree that the normalization of the risk-free rate is now something to seriously consider.

We’ll have more details in a future BVWire (free signup) and an expanded article in an upcoming issue of Business Valuation Update (subscription required).


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