Duff & Phelps Recommended U.S. Equity Risk Premium Increased from 5.0% to 6.0% Effective March 25, 2020

Duff & Phelps Recommended U.S. Equity Risk Premium Increased From 5.0% to 6.0%.

Duff & Phelps regularly reviews fluctuations in global economic and financial market conditions that warrant a periodic reassessment of the Equity Risk Premium (ERP) and accompanying risk-free rate, key inputs used to calculate the cost of equity capital in the context of the Capital Asset Pricing Model (CAPM) and other models used to develop discount rates. 

The outbreak of coronavirus (COVID-19) has generated an unprecedented reaction to a global pandemic. Government policies of social distancing have led to supply chain disruptions and the closure of many businesses, harming business confidence; this has led to job losses in several industries, in turn hurting consumer confidence. Global equity markets have collapsed at a speed faster than observed during the 2008 global financial crisis. Equity volatility has reached record highs, while corporate credit spreads have surged. Economists have slashed real economic growth projections, with several sources predicting a global recession in 2020. Major central banks have begun to implement quantitative easing and other crisis-related measures employed during the 2008 financial crisis. Some governments are also in the process of approving or have already enacted sizable fiscal stimulus packages.

Based on current market conditions, Duff & Phelps is increasing its U.S. ERP recommendation from 5.0% to 6.0% when developing discount rates beginning on March 25, 2020 and thereafter, until further guidance is issued. To be clear, this means that for critical quarter-end valuations dated March 31, 2020, the recommended ERP is 6.0%. However, several economic and financial risk factors that we evaluate were already present during the week of March 9, 2020.

This ERP recommendation is to be used in conjunction with a normalized risk-free rate of 3.0%, implying a base U.S. cost of equity capital of 9.0% (6.0% + 3.0%).

Duff & Phelps will issue a more detailed Client Alert documenting the rationale behind the new recommendation. 

 
Duff & Phelps Recommended U.S. Equity Risk Premium Increased from 5.0% to 6.0% Effective March 25, 2020 2020-03-27T00:00:00.0000000 /insights/publications/cost-of-capital/us-equity-risk-premium-increased-march-25-2020 /-/media/assets/images/publications/featured-images/2020/dp-rec-change-erp.jpg publication {E064CD47-11DF-428E-AC59-7AF718C23FCB} {B062D54C-1425-4A04-8F9F-95EA14068E6D} {51947818-C499-4911-9447-3AA383066F9E}

Related Services

Cost of Capital

Estimating the cost of capital is one of the most important decisions that corporate finance professionals make. Explore Duff & Phelps' videos, books and tool.

Cost of Capital

Business Valuation and Appraisals

Duff & Phelps provides valuation and asset appraisal for financial reporting, income tax, investment and risk management purposes.

Business Valuation and Appraisals

Insights

State and Local Tax

Switzerland’s Package of Tax Relief Measures in Response to COVID-19

State and Local Tax
Publication

Annual Case Summaries: Key Delaware Business Valuation Decisions

Publication
Valuation

Big Oil’s Response to the Current Market Environment: Capex Cut Tracker Update

Valuation