2017 Valuation Handbook International Guide to Cost of Capital

EVERYTHING YOU NEED FOR ACCURATE INTERNATIONAL COST OF CAPITAL ESTIMATIONS—IN A SINGLE VOLUME

The 2017 Valuation Handbook – International Guide to Cost of Capital is part of the U.S. and international series of valuation resources authored by Duff & Phelps and published by John Wiley & Sons. This annually updated reference provides business valuation and finance professionals with the critical data they need to assess risk and develop cost of capital estimates on a global scale.

Gauging the risks of an international investment is one of the trickiest aspects of finance. This comprehensive guidebook provides you with usable international data and methodology, and the ability to:

• Turn to a definitive resource of world-class data and guidance to gain a distinct competitive advantage in real-world situations.
• Access costly and difficult-to-obtain international data, assembled into easy-to-use cost of capital inputs at an accessible price point.
• Quickly grasp how concepts and methodologies translate into actual practice when they are brought to life in exemplifying cases.

Accurate. Reliable. Trusted. The 2017 Valuation Handbook – International Guide to Cost of Capital gives you the upper hand the moment you open it.

Other volumes in the annual series include:

• 2017 Valuation Handbook – International Industry Cost of Capital
• 2017 Valuation Handbook – U.S. Guide to Cost of Capital
• 2017 Valuation Handbook – U.S. Industry Cost of Capital

Roger J. Grabowski is a managing director with Duff & Phelps. He is coauthor of Cost of Capital – Applications and Examples, Fifth Edition, The Lawyer's Guide to Cost of Capital, and Cost of Capital in Litigation.

James P. Harrington is a director at Duff & Phelps. He is a leading contributor to Duff & Phelps' efforts in the development of studies, surveys, online content and tools, firm-wide valuation models, data distribution platforms, and published thought leadership. He is a coauthor of the Duff & Phelps "Valuation Handbook" series, a contributing author to Cost of Capital – Applications and Examples, Fifth Edition, and a Duff & Phelps contributor to the Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook.

Carla S. Nunes is a managing director in the Office of Professional Practice at Duff & Phelps, where she provides firm-wide technical guidance on a variety of valuation, financial reporting, and tax issues, with a particular focus on cost of capital. She is a coauthor of the Duff & Phelps "Valuation Handbook" series and a contributing author to Cost of Capital – Applications and Examples, Fifth Edition.

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

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