Description
2024-194: Improving Your Cost of Capital Estimates – Theory vs. Practice Using a Case Stud
**Webinar 194: Live Broadcast Date: October 10, 2024, 1:00-4:00 pm EDT**
Speaker: Carla Nunes, CFA/ABV
Description:
The U.S. economy proved to be surprisingly resilient in 2023, but growth is decelerating in 2024. The process of disinflation is well under way, but while rate cuts are expected to begin in 2024 the Federal Reserve has been cautious on the timing and magnitude of interest rate cuts. The U.S. is also heading into Presidential elections, creating additional uncertainty for businesses and consumers. Failure to address the growing U.S. Federal debt burden and large budget deficits could place upward pressures on long-term interest rates. These headwinds mean that companies are now facing a higher cost of capital that matches the levels last seen during the 2008–2009 Global Financial Crisis.
This is the perfect time to revisit your cost of capital assumptions. This session will bridge the gap between the theory of how some of the cost of capital inputs are derived while also walking through a case study on how to use various Cost of Capital Navigator data sets to support industry risk and size adjustments. A brief discussion on selecting capital structures and concluding on cost of debt estimates will also be provided.
Learning Objectives:
After completing this session, attendees will be able to:
- Understand the background on how the Kroll normalized risk-free rate was derived and why the current spot yield on U.S. Treasuries is more appropriate as a risk-free rate for current valuations.
- Describe various method that can be used to estimate the equity risk premium.
- Adjust industry risk premium by selecting different types of CAPM betas.
- Identify different formulas to unlever equity betas and understand the circumstances when they may be more appropriate to employ.
- Understand the concept of debt betas.
- Distinguish between the Kroll CRSP Deciles Size Study and the Kroll Risk Premium Report when arriving at a size risk adjustment.
- Identify the circumstances where the use of Deciles 10y and 10z may be appropriate when selecting a size premium.
- Select a capital structure that is internally consistent with your standard of value and valuation purpose.
- Reflect the impact of higher interest rates on cost of debt estimates.
Handouts:
- VPS webinar PowerPoint slides
- Excel of Kroll- Cost of Capital Data
- Access to a video recording of the program
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