2017 Valuation Handbook - International Guide to Cost of Capital

Acknowledgements xiv

Introduction xv

Who Should Use the 2017 Valuation Handbook – International Guide to Cost of Capital xv

New and Notable xvi

About the International Valuation Handbook – Guide to Cost of Capital xviii

ERPs, CRPs, and RVs Are Different, and Are Properly Used Differently xxi

Risk Premia Over the Risk-free Rate and Risk Premia over CAPM (i.e., size premia)

Measure Different Types of Risks xxii

Chapter 1 International Cost of Capital – Overview 1-1

Cost of Capital Defined 1-1

Are Country Risks Real? 1-2

Risks Typically Associated with International Investment 1-5

Does the Currency Used to Project Cash Flows Impact the Discount Rate? 1-11

Summary 1-13

Chapter 2 Strengths and Weaknesses of Commonly Used Models 2-1

World (or Global) CAPM 2-1

Single-country Version of the CAPM 2-4

Damodaran’s Local Country Risk Exposure Model 2-5

Alternative Risk Measures (downside risk) 2-6

What Model Should I Use? 2-11

Chapter 3 International Equity Risk Premia 3-1

Description of Data 3-1

Change in Short-term Risk-free Rate Series 3-3

U.S. SBBI Long-term Government Bond Series Data Revision (immaterial) 3-3

Methodology 3-4

Description of Data Series Used 3-8

Currency Translation 3-15

How to Use the International ERP Tables 3-17

Appendix 3A: Additional Sources of International ERP Data 3A-1

Dimson, Marsh, and Staunton Equity Risk Premia Data 3A-1

Pablo Fernandez Equity Risk Premia and Risk-free Rate Surveys 3A-7

Appendix 3B: Additional Sources of Equity Risk Premium Data – Australia 3B-1

Overview of the Australian Dividend Imputation Tax System 3B-1

Australian Equity Risk Premium Under Three Investor Perspectives 3B-2

Appendix 3C: Additional Sources of Equity Risk Premium Data – Canada 3C-1

The Current State of the Canadian Bond Market, and an Estimate of the Canadian Equity Risk Premium 3C-1

Conclusions 3C-7

Final Thoughts: Duff & Phelps Analysis on Methods of Estimating a Normalized Risk-free Rate 3C-9

2017 Valuation Handbook – International Guide to Cost of Capital xiii

Chapter 4 Country Yield Spread Model 4-1

Introduction 4-1

Brief Background on Euromoney’s ECR Score 4-2

Investor Perspectives 4-3

Country Yield Spread Model 4-4

Methodology – Country Yield Spread Model 4-6

Using Country Yield Spread Model CRPs to Estimate Base Country-level Cost of Equity Capital 4-10

Using Country Yield Spread Model CRPs to Estimate Cost of Equity Capital for Use in Evaluating a Subject Business, Asset, or Project 4-12

Chapter 5 Relative Volatility Model 5-1

Relative Volatility Model 5-1

Investor Perspectives 5-2

Methodology – Relative Volatility Model 5-4

Using Relative Volatility Model RV Factors to Estimate Base Country-level Cost of Equity Capital 5-5

Using Relative Volatility Model RV Factors to Estimate Cost of Equity Capital for Use in

Evaluating a Subject Business, Asset, or Project 5-7

Chapter 6 Erb-Harvey-Viskanta Country Credit Rating Model 6-1

A Notable Difference with Previous Reports: Country Risk Premia (CRPs) 6-2

Data Sources 6-3

The CCR Model 6-7

Different Investor Perspectives 6-8

Global Cost of Equity Capital – High-level Comparisons 6-10

Presentation of Cost of Capital Data 6-16

Country Risk Premia (CRP) Defined 6-17

How CRPs Are Calculated 6-17

Using CCR Model CRPs to Estimate Base Country-level Cost of Equity Capital 6-19

Using CCR Model CRPs to Estimate Cost of Equity Capital for Use in Evaluating a Subject Business, Asset, or Project 6-22

Chapter 7 Firm Size and the Cost of Equity Capital in Europe 7-1

Differences in Returns Between Large and Small Companies in Europe 7-1

Countries Included 7-2

Data Sources 7-2

Regional Differences 7-3

Two Types of Risk Premia Examined 7-5

Conclusion 7-11

Data Exhibit 1: International Equity Risk Premia (ERPs)

Data Exhibit 2: Country Yield Spread Model: Country Risk Premia (CRPs)

Data Exhibit 3: Relative Volatility Model: Relative Volatility (RV) Factors

Data Exhibit 4: Erb-Harvey-Viskanta Country Credit Rating Model: Country Risk Premia (CRPs)

Data Exhibit 5: Study of Differences in Returns Between Large and Small Companies in Europe