Leading global valuation experts and finance professors chimed in on the impact of the Brexit vote on cost of capital during a recent webinar from Duff & Phelps. One message they all stressed is to maintain internal consistency between the elements of cost of capital and the current economic environment. Also, you need to consider that there may be a “new normal” in terms of interest rates, risk premiums, and growth.
Just another crisis: Brexit is simply a “garden variety” crisis similar to others over the past five years, such as the crises in China, Russia, and Greece, according to Aswath Damodaran (New York University Stern School of Business). To treat Brexit differently is a “mistake,” he says. Rather than thinking about the effects of Brexit separately on the three basic elements of valuation (cash flow, growth rate, and discount rate), valuators should instead focus on being internally consistent. He points out that a crisis such as this “muddies the waters” for all three elements, but, if you’re consistent with the way you deal with Brexit with all of the three ingredients, your mistakes will “tend to average out.” If you’re not consistent, that’s “when you get into trouble.”
Speakers Elroy Dimson (Judge Business School, University of Cambridge) and Pablo Fernández (University of Navarra—IESE Business School in Spain) agreed with the idea of consistency. Webinar host Roger J. Grabowski (Duff & Phelps) also agreed and stressed that matching the cash flows to your expectations and the consistency of those expectations with the economic environment are a critical element of your valuation. This includes a consideration that long-term growth may be much lower going forward in the U.S., U.K., and the eurozone than what may have been expected before. “Maybe we are in a ‘new normal,’ with lower interest rates, higher risk premiums and slower growth,” says Grabowski. “It’s something for all of us to consider as we do our valuations.”For more—plus a link to a complimentary replay of the webinar—see the BVWire.