DISCLAIMER - NACVAcw.nacva.com/PERC/Business Valuation/2014/Cost_of... · The SBBI Valuation...

The Consultants' Training Institute (CTI) is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional

education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit.

Complaints regarding registered sponsors may be submitted through its web site: learningmarket.org.

DISCLAIMER

All rights reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means—graphically,

electronically, or mechanically, including photocopying, audio/video recording, or information storage and retrieval of any kind—without the express

written permission of the Consultants’ Training Institute™ (CTI™), the National Association of Certified Valuators and Analysts™ (NACVA®), and the

presenter.

The information contained in this presentation is only intended for general purposes.

It is designed to provide authoritative and accurate information about the subject covered. It is sold with the understanding that the copyright holder is

not engaged in rendering legal, accounting, or other professional service or advice. If legal or other expert advice is required, the services of an

appropriate professional person should be sought.

The material may not be applicable or suitable for the reader’s specific needs or circumstances. Readers/viewers may not use this information as a

substitute for consultation with qualified professionals in the subject matter presented here.

Although information contained in this publication has been carefully compiled from sources believed to be reliable, the accuracy of the information is

not guaranteed. It is neither intended nor should it be construed as either legal, accounting, and/or tax advice, nor as an opinion provided by the

Consultants’ Training Institute (CTI), the National Association of Certified Valuators and Analysts (NACVA), the Institute of Business Appraisers (IBA),

the presenter, or the presenter’s firm.

The authors specifically disclaim any personal liability, loss, or risk incurred as a consequence of the use, either directly or indirectly, of any information

or advice given in these materials. The instructor’s opinion may not reflect those of the CTI, NACVA, its policies, other instructors, or materials.

Each occurrence and the facts of each occurrence are different. Changes in facts and/or policy terms may result in conclusions different than those

stated herein. It is not intended to reflect the opinions or positions of the authors and instructors in relation to any specific case, but, rather, to be

illustrative for educational purposes. The user is cautioned that this course is not all inclusive.

© 2014 National Association of Certified Valuators and Analysts (NACVA). All rights reserved. • 5217 South State Street, Suite 400, SLC, UT, 84107.

The Presentation will include periodic online Polling Questions/Codes to assess continuous participation and to determine the program’s effectiveness.

You MUST respond to all polling questions (live) or complete a quiz (recorded) in order to receive CPE credit.

If you view the webinar with a Smartphone or Tablet you will NOT be able to answer polling questions that are required for obtaining CPE credit.

If you are viewing this presentation as a recorded webinar it will not qualify for NASBA QAS CPE credit. You can however, obtain CPE credit per the instructions included with your recorded webinar purchase.

2014 Valuation

Handbook—

Guide to Cost of

Capital

Roger Grabowski, FASA

Roger J. Grabowski, FASA, is a Managing Director at Duff & Phelps LLC. He was formerly Managing

Director of the Standard & Poor’s Corporate Value Consulting practice, a partner of

PricewaterhouseCoopers LLP and one of its predecessor firms, Price Waterhouse (where he founded

its U.S. Valuation Services practice and managed the real estate appraisal practice).

He has directed valuations of businesses, interests in businesses, intellectual property, intangible

assets, real property and machinery and equipment. Roger has testified in court as an expert witness

on matters of solvency, the value of closely held businesses and business interests, valuation and

amortization of intangible assets and other valuation issues. His testimony in U.S. District Court was

referenced in the U.S. Supreme Court opinion decided in his client’s favor in the landmark Newark

Morning Ledger case.

Roger is co-author with Shannon Pratt of Cost of Capital: Applications and Examples, 5th ed.

forthcoming in April 2014 (John Wiley & Sons, 2014); co-author with Shannon Pratt of The Lawyer’s

Guide to Cost of Capital forthcoming (ABA, 2014); co-author with Shannon Pratt of Cost of Capital:

Applications and Examples, 4th ed. and Cost of Capital in Litigation: Applications and Examples and

has been the author of the annual Duff & Phelps Risk Premium Report.

Roger teaches courses for the American Society of Appraisers including Cost of Capital, a course he

developed.

Morningstar announced in late September, 2013, that it will no longer publish the Ibbotson SBBI Valuation Yearbook and other valuation publications and products.

The SBBI Valuation Yearbook and other “Ibbotson” valuation products have been widely used and cited in valuation reports for nearly 15 years and are generally considered one of the essential tools needed in every practitioner’s toolbox.

Last year’s 2013 SBBI Valuation Yearbook (with data through Dec. 31, 2012) is Morningstar’s last SBBI Valuation Yearbook—Morningstar will not be publishing a 2014 version (with data through Dec. 31, 2013).

6 © 2014 National Association of Certified Valuators and Analysts

SBBI Classic Edition - continuing

Addition of size premia for CRSP standard market-

cap-weighted deciles 1-10 only

“Supply-Side” Equity Risk Premium

Classic Edition is an analysis of the relative

performance of various asset classes in the U.S.

and does not provide extensive valuation data or

methodology


SBBI Valuation Edition - discontinued

◦ Discontinued:

Breakout of the 10th decile into 10a and 10b

or 10w, 10x, 10y, and 10z

Industry Risk Premia for use in build-up

method


Discontinued

Cost of Capital Yearbook – industry cost of capital

info

Individual company beta (OLS, Peer group, Ibbotson

adjusted) and Fama-French factors

International reports

CCRC.com website


2014 Valuation Handbook

Includes all of the critical year-end data that was

previously available in the SBBI Valuation

Yearbook

Timed to provide users of SBBI valuation data with

a source of data to complete year-end valuations

without interruption.


Valuation Handbook will include two sets of valuation

data:

Data previously available in the SBBI Valuation

Yearbook; and

Data available in Duff & Phelps Risk Premium

Report.


2014 Valuation Handbook includes all of the “key variables in estimating the cost of capital” previously published in the user-friendly SBBI Yearbook’s “back page,” including:

Yields ◦ Long-term (20-year) U.S. Treasury Coupon Bond Yield as

of December 2013

Equity Risk Premium ◦ Long-horizon expected “historical” equity risk premium

(1926-2013)

◦ Long-horizon expected “supply side” equity risk premium (1926-2013)


Size Premia

◦ CRSP Mid-Cap, Low-Cap, and Micro-Cap size

premia

◦ CRSP Deciles 1 through 10 size premia

◦ Size premia for the breakdown of CRSP Decile 10

into 10a (and its subdeciles 10w and 10x) and 10b

(and its subdeciles 10y and 10z)


Industry Risk Premium

◦ Industry risk premia (IRPs) previously found in Table

3-5 in the SBBI Valuation Yearbook.

◦ An IRP is used solely within the context of a build-up

model. IRPs are a necessary cost of capital

ingredient for those practitioners who like to use a

build-up model in their valuation analysis (alone, or

in addition to CAPM).


Industry Risk Premium – expanded data

◦ Full-information beta by SIC code

◦ IRPs based on three estimates of ERP

Historical ERP (1926-2013)

Supply-side (1926-2013)

Duff & Phelps recommended ERP (conditional as of

January 1, 2014)


The same data sources used to produce the data

in the former SBBI Valuation Yearbook are used to

produce the new Valuation Handbook:

◦ The Center for Research in Security Prices (CRSP)

market-cap-based NYSE/AMEX/NASDAQ indices;

◦ Standard & Poor’s Research Insight database; and

◦ SBBI Series from Morningstar’s EnCorr database.

The same methodologies are used to produce the

new Valuation Handbook.


Risk Premium Report

Published annually since 1996 and, like the former

SBBI Yearbook, provides data and methodology to

assist financial professionals in estimating the cost

of equity capital for a subject company using

various build-up models and CAPM.

Will no longer be published as a stand-alone

publication.

All of its data will be included in the Valuation

Handbook.


Risk Premium Report includes

Size premia based on 8 size measures

◦ For build-up method

◦ For CAPM

Risk premia based on 3 measures of fundamental

risk

◦ For build-up

Relationship of size to other risk characteristics

Returns for high-financial-risk companies


2014 Valuation Handbook is designed to complement

and update analyses presented in the upcoming:

Cost of Capital: Applications and Examples 5th ed.

by Shannon P. Pratt and Roger J. Grabowski

Expected shipping date – mid-April 2014.


Table of Contents: Introduction Ch. 1 – Cost of Capital Defined Ch. 2 – Methods for Estimating the Cost of Equity Capital Ch. 3 – Basic Building Blocks of the Cost of Equity Capital – Risk-free

Rate & Equity Risk Premium Ch. 4 – Basic Building Blocks of the Cost of Equity Capital – Size

Premium Ch. 5 – Beta & Industry Risk Premia Ch. 6 – Company-specific Risk Premium Ch. 7 – The CRSP Decile Studies and the Risk Premium Report – A Comparison Ch. 8 – Using the CRSP Decile Size Premia Ch. 9 – Using the Risk Premium Report CRSP Decile Size Premia Data Exhibits Risk Premium Report Data Exhibits


2014 Valuation Handbook expected shipping date

– March 17

Everyone who pre-orders will receive via email:

“Key Year-end Data as of 12/31/13”


Yields

◦ Long-term (20-year) U.S. Treasury Coupon Bond

Yield as of December 2013

Equity Risk Premium

◦ Long-horizon expected “historical” equity risk

premium (1926-2013)

◦ Long-horizon expected “supply side” equity risk

premium (1926-2013)

◦ Duff & Phelps recommended conditional ERP


Size Premia

◦ CRSP Mid-Cap, Low-Cap, and Micro-Cap size

premia

◦ CRSP Deciles 1 through 10 size premia

◦ Size premia for the breakdown of CRSP Decile 10

into 10a (and its subdeciles 10w and 10x) and 10b

(and its subdeciles 10y and 10z)


The following exhibit summarizes the valuation

data and products that Morningstar is

discontinuing. This data had been provided in two

broad ways: (i) hardcover books and

downloadable PDF reports; and (ii) on the Cost of

Capital Resources website at

CCRC.Morningstar.com (Note: the CCRC website

was “switched off” on Dec. 31, 2013).


Hardcover Books and PDFs

(discontinued)

CCRC.Morningstar.com website

(discontinued)

Ibbotson SBBI Valuation Yearbook SBBI Valuation Essentials module*

Individual Company Betas

(in PDF format)

Company Betas module

(also sold seperately as PDF "tear" sheets)

Ibbotson Cost of Capital YearbookIndustry Analysis module**

(also sold seperately as PDF "tear" sheets)

International Cost of Capital Reports

(in PDF format)

Int'l Cost of Capital module

(also sold seperately as individual PDF reports)

• Int'l Cost of Capital Report

• Int'l Cost of Capital Perspective Report

• Int'l Equity Risk Premium Report

* These reports included the most "essential" information from each of the 1999–2013 SBBI

Valuation Yearbook (in PDF format).

** These reports were individual industry analysis pages from the Ibbotson Cost of Capital

Yearbook, over time (in PDF format).


Beta estimates

Industry

Individual company

If you use published betas like Capital IQ or Value

Line use same source for all companies

International cost of capital

Credit Suisse Global Investment Returns Sourcebook

– Dimson, Marsh & Staunton

Damodaran website

Campbell Harvey model


Updated Valuation Software – All three applications (BVM Pro, ValuSource Pro and EBV) will be updated to incorporate both datasets from the Valuation Handbook. This update will be free for existing version 5, 6 and 7 customers.

Valuation Handbook Purchase Options from NACVA & ValuSource: ◦ Book only ($225) ◦ Book + Web-based Data ($325) – This database contains all the

data elements as in the former SBBI Valuation Yearbook will be available to download into all the ValuSource valuation applications just like the SBBI Valuation Yearbook data was.

◦ Book + Web-based Data + Cost of Capital Analyzer ($519) – In addition to the web-based data, ValuSource will have a web based Analyzer that creates Cost of Equity reports from the Risk Premium Report data. These reports can be automatically downloaded in to ValuSource valuation applications or exported to Excel.


DISCLAIMER - NACVAcw.nacva.com/PERC/Business Valuation/2014/Cost_of... · The SBBI Valuation...

Documents

Transcript of DISCLAIMER - NACVAcw.nacva.com/PERC/Business Valuation/2014/Cost_of... · The SBBI Valuation...