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The New Industry Standard in Business Valuation Reference Materials2016 Valuation Handbook - Guide to Cost of Capital provides the key annual valuation data previously published in (i) the now discontinued Morningstar/Ibbotson SBBI Valuation Yearbook (discontinued in 2013), and (ii) the Duff & Phelps Risk Premium Report (no longer published as a stand-alone publication).The size premia data previously published in the SBBI Valuation Yearbook is referred to as the "CRSP Deciles Size Premia" exhibits in the new 2016 Valuation Handbook - Guide to Cost of Capital, while the size and risk premia data published in the Duff & Phelps Risk Premium Report has been published annually since 1996 and, like the former SBBI Valuation Yearbook, provides data and methodology that can be used to develop cost of equity capital estimates using (i) the build-up method and (ii) the capital asset pricing model (CAPM).The 2016 Valuation Handbook includes data through December 31, 2015, and is intended to be used for 2016 valuation dates.For more information about Duff & Phelps valuation data resources published by Wiley, please visit www.wiley.com/go/valuationhandbooks.Also Available2016 Valuation Handbook - Industry Cost of Capital2016 International Valuation Handbook - Guide to Cost of Capital2016 International Valuation Handbook - Industry Cost of CapitalKey FeaturesKey cost of capital outputs: The 2016 Valuation Handbook provides the key inputs needed for developing the cost of equity capital (i.e., "discount rate") for use in estimating the value of a subject business, business ownership interest, security, or intangible asset. Inputs provided include: equity risk premia, size premia, risk premia over the risk free rate, full-information industry betas, industry risk premia, and risk-free yields.Discussion of topics that come up most when performing valuation analysis: The 2016 Valuation Handbook includes straightforward discussions about: (i) valuation theory, (ii) the differences between the various cost of capital estimation models (build-up, CAPM, Fama-French), (iii) understanding the basic building blocks of cost of equity capital (the risk-free rate, the equity risk premium, the size premium, beta, the industry risk premium, the company-specific risk premium), (iv) whether to "normalize" risk-free rates or not, (v) a detailed comparison of the CRSP Deciles Size Premia Study (this is the former SBBI Valuation Yearbook data) and the Risk Premium Report Study, and more.Easy-to-follow examples: The 2016 Valuation Handbook is packed with easy-to-understand examples for properly using the data to develop levered, unlevered, and even "high-financial-risk" cost of equity capital using various build-up methods and the CAPM.
Contents
Acknowledgements xi Introduction xiiChapter 1 Cost of Capital Defined 1-1Introduction 1-1Income Approach Overview 1-2Discounting versus Capitalizing Concepts 1-2Valuation Date 1-5Basic Cost of Capital Concepts 1-5Sources of Capital 1-9Cost of Capital Input Assumptions 1-10Capital Structure Considerations 1-16Calculating WACC 1-17Estimates of Cost of Capital are Imprecise 1-19Key Things to Remember about Cost of Capital 1-20Chapter 2 Methods for Estimating the Cost of Equity Capital 2-1Basic Framework 2-1Types of Risk 2-6Cost of Equity Capital Estimation Methods 2-8Build-up 2-10CAPM 2-11Other Cost of Equity Capital Estimation Methods 2-15Key Things to Remember about the Methods for Estimating the Cost of Equity Capital 2-16Chapter 3 Basic Building Blocks of the Cost of Equity Capital Risk-free Rate and Equity Risk Premium 3-1The Risk-free Rate and Equity Risk Premium: Interrelated Concepts 3-1Spot Risk-free Rates versus Normalized Risk-free Rates 3-2Methods of Risk-free Rate Normalization 3-15Spot Yield or Normalized Yield? 3-18Equity Risk Premium 3-20Estimating the Equity Risk Premium 3-21Duff & Phelps Recommended ERP 3-33Concluding on an ERP 3-39Chapter 4 Basic Building Blocks of the Cost of Equity Capital Size Premium 4-1Size as a Predictor of Equity Returns 4-1Possible Explanations for the Greater Returns of Smaller Companies 4-2The Size Effect: Empirical Evidence 4-2The Size Effect Over Longer Periods 4-3The Size Effect Tends to Stabilize Over Time 4-6The Size Effect Changes Over Time 4-7Criticisms of the Size Effect 4-8Data Issues 4-12Has the Size Effect Disappeared in More Recent Periods? 4-17Relationship of Size and Liquidity 4-21Key Things to Remember about the Size Premium 4-26Chapter 5 Basic Building Blocks of the Cost of Equity Capital Betas and Industry Risk Premia 5-1Beta 5-1Differences in Estimation of Equity Betas 5-7Full-Information Beta 5-11Industry Risk Premia 5-12Full-Information Beta Methodology 5-16Debt Betas 5-17Unlevering and Levering Equity Betas 5-18Key Things to Remember about Betas and the Industry Risk Premia 5-19Chapter 6 Basic Building Blocks of the Cost of Equity Capital Company-specific Risk Premia 6-1Introduction 6-1Adjustments for Differences in Risk 6-2Adjustments for Risk in Net Cash Flows and Biased Projections 6-5Adjustments for Other Risk Factors 6-7Matching Fundamental Risk and Return 6-8Key Things to Remember about Company-specific Risk Premia 6-10Chapter 7 The CRSP Deciles Size Premia Studies and the Risk Premium Report Studies A Comparison 7-1History of the CRSP Deciles Size Premia Studies 7-1History of the Risk Premium Report Studies 7-2Data Sources 7-2Definitions of Size 7-6Time Period Examined 7-6Number of Portfolios 7-7Portfolio Overlap 7-7Guideline Portfolio Method and Regression Equation Method 7-8Risk Premia Over CAPM (Size Premia) 7-8Smoothed Premia versus Average Premia 7-12OLS Beta versus Sum Beta 7-12Risk Premia Over the Risk Free Rate 7-12Unlevered Premia 7-13Risk Study 7-13Characteristics of Companies in Portfolios 7-13Online Applications 7-14Chapter 8 CRSP Deciles Size Premia Examples 8-1Build-up Example 8-1CAPM Example 8-4Key Things to Remember about the CRSP Deciles Size Premia 8-7Chapter 9 Risk Premium Report Exhibits General Information 9-1Appropriate Use of the Risk Premium Report Exhibits 9-1How the Risk Premium Report Exhibits are Organized 9-1Cost of Equity Capital Estimation Methods Available 9-3Proper Application of the Equity Risk Premium (ERP) Adjustment 9-4Smoothed Premia versus Average Premia 9-7The Guideline Portfolio Method versus the Regression Equation Method 9-8Example: Calculating an Interpolated Premium Using the Regression Equation Method 9-9Tips Regarding the Regression Equation Method 9-10Can the Regression Equation Method be Used if the Subject Company is Small? 9-10Size Study or Risk Study? 9-11Key Things to Remember About the Risk Premium Report Exhibits 9-12Chapter 10 Risk Premium Report Exhibits Examples 10-1Size Study 10-1Reasons for Using Additional Measures of Size 10-1The Difference Between the Size Study s A Exhibits and the B Exhibits 10-2The Difference Between Risk Premia Over the Risk-free Rate and Risk Premia Over CAPM 10-2Calculating Custom Interpolated Premia for Smaller Companies 10-6Overview of Methods Used to Estimate Cost of Equity Capital Using the Size Study 10-9Size Study Examples: Assumptions Used 10-10Size Study Examples 10-12Unlevered Cost of Equity Capital 10-17Overview of the Methodology and Assumptions Used to Unlever Risk Premia 10-18Estimating Cost of Equity Capital Using the Build-up 1-Unlevered Method 10-22Estimating Cost of Equity Capital Using the Capital Asset Pricing Model (CAPM) 10-26Estimating Cost of Equity Capital Using the Build-up 2 Method 10-30Risk Study 10-35Overview of Methods Used to Estimate Cost of Equity Capital Using the Risk Study 10-42Risk Study Examples 10-45Build-up 3-Unlevered 10-49High-Financial-Risk Study 10-51Overview of Methods Used to Estimate Cost of Equity Capital Using the High-Financial-Risk Study 10-57Estimating Cost of Equity Capital Using the Build-up 1-High-Financial-Risk Method 10-58Estimating Cost of Equity Capital Using the CAPM-High-Financial-Risk Method 10-61Comparative Risk Study 10-63Using the Comparative Risk Study to Refine Build-up Method Estimates 10-67Using the Comparative Risk Study to Refine CAPM Estimates 10-69Chapter 11 Real Estate 11-1Individual Real Estate Assets 11-1Real Estate Investment Trusts (REITs) 11-2Structure of Real Estate Entities 11-2Correlation of U.S. REITs Compared to Other U.S. Asset Classes 11-3Summary Statistics of U.S. REITs Compared to Other U.S. Asset Classes 11-5Real Estate Property Valuation Inputs 11-8Key Things to Remember about Real Property Valuation 11-16Chapter 12 Answers to Commonly Asked Questions 12-1GlossaryIndexAppendix 1 Definitions of Standard & Poor s Compustat Data Items Used to Calculated the Risk Premium Report ExhibitsAppendix 2 Changes to the Risk Premium Report Over TimeAppendix 3 CRSP Deciles Size Premia Study: Key VariablesAppendix 3a Industry Risk Premium (RPi)Appendix 3b Debt BetasAppendix 4 Risk Premium Report Study Exhibits
