Ibbotson SBBI 2009 Valuation Yearbook. Market Results for Stocks, Bonds, Bills, and Inflation

Transcription

1 Ibbotson SBBI 2009 Valuation Yearbook Market Results for Stocks, Bonds, Bills, and Inflation

2 2009 Ibbotson Stocks, Bonds, Bills, and Inflation Valuation Yearbook Stocks, Bonds, Bills, and Inflation and SBBI are registered trademarks of Morningstar, Inc. Ibbotson and Ibbotson Associates are registered trademarks of Ibbotson Associates, a wholly owned subsidiary of Morningstar, Inc., and are used with permission. The information presented in this publication has been obtained with the greatest of care from sources believed to be reliable, but is not guaranteed to be complete, accurate or timely. Morningstar and its affiliated companies expressly disclaim any liability, including incidental or consequential damages, arising from the use of this publication or any errors or omissions that may be contained in it Morningstar. All rights reserved. No part of this publication may be reproduced or used in any other form or by any other means graphic, electronic, or mechanical, including photocopying, recording, taping, or infor mation storage and retrieval systems without Morningstar s prior, written permission. To obtain permission, please call Product Sales or write to the address below. Your request should specify the data or other information you wish to use and the manner in which you wish to use it. In addition, you will need to include copies of any charts, tables, and/or figures that you have created based on that information. There is a $1500 processing fee per request. There may be additional fees depending on your proposed usage. Published by: Morningstar, Inc. 22 W. Washington Chicago, Illinois Main (312) Product Sales (888) Fax (312) global.morningstar.com/sbbiyearbooks ISBN ISSN x Ibbotson Associates is a leading authority on asset allocation with expertise in capital market expectations and portfolio implementation. Approaching portfolio construction from the top-down through a research-based investment process, its experienced consultants and portfolio managers serve mutual fund firms, banks, broker-dealers, and insurance companies worldwide. Ibbotson Associates methodologies and services address all investment phases, from accumulation to retirement and the transition between the two. Visit Ibbotson.com for contact information, published research, product fact sheets and other information. For more information about Morningstar s software and data products for individuals, advisors, and institutions, see Investment Tools and Resources at the back of this book, or call (800) Additional copies of the 2009 Ibbotson SBBI Valuation Yearbook may be obtained for $165 per book, plus shipping and handling. Archived editions (2008 and prior) are available in limited quantities for $200 per book, plus shipping and handling. For purchasing or other information related to volume discounts or companion publications, please call (888) , or write to the address above.

3 Table of Contents Acknowledgments Introduction 1 vi References 4 Chapter 1 Business Valuation 9 Preperation 11 Standard of Value 11 Definitions and Guidelines 11 Ownership Interest 12 Valuation Date 12 Fundamental Factors 12 Income Approach to Valuation 13 Free Cash Flow 13 Weighted Average Cost of Capital 14 Tax Rate Assumptions 15 Other Income Approach Considerations 15 Market Approach to Valuation 16 Guideline Public Companies 16 Gathering Data 16 Example Using the P/E Ratio 18 Guideline Transaction Data 18 Asset-Based Approach to Valuation 18 Chapter 2 Introduction to the Cost of Capital 21 Defining the Cost of Capital 21 Description of SBBI Data Series 21 A Look at Historical Returns 22 Summary Statistics for Basic Series 22 Annual Total Returns 23 Real Rates versus Nominal Rates 23 Real Rates as a Component of the Cost of Capital 26 Cost of Debt 26 Application of the Cost of Capital Ibbotson SBBI Valuation Yearbook Morningstar i

4 Business Valuation 26 Regulatory Proceedings 27 Project Selection 28 Shareholder Value Added 28 Chapter 3 The Buildup Method 29 The Buildup Method for Cost of Equity Capital 29 Risk-Free Rate 29 Risk Premia 29 Small Stock or Size Premia 29 Industry Premia 30 Common Misconceptions and Questions 31 Other Building Blocks 32 Estimating the Cost of Equity Using the Data Presented in this Book: 32 Buildup Method Example Using Current Data 33 Example Estimating the Cost of Equity for a Prior Year 33 Chapter 4 Overview of Cost of Equity Capital Models 45 The Capital Asset Pricing Model 45 Systematic Risk 45 Risk-Free Rate 46 CAPM Modified for Firm Size 46 Estimating the Cost of Equity Using the Data Presented in this Book: 47 Modified CAPM Method Example Using Current Data 47 Example Estimating the Cost of Equity for a Prior Year 48 Arbitrage Pricing Theory 48 Fama-French Three Factor Model 49 The Discounted Cash Flow Model 49 The Single-Stage Growth Model (Gordon Growth Model) 49 The Two-Stage Growth Model 50 The Three-Stage Growth Model 51 Quarterly Dividend Adjustment 51 Estimating Growth Rates 52 ii Table of Contents

5 Chapter 5 The Equity Risk Premium 55 Calculating the Historical Equity Risk Premium 55 The Stock Market Benchmark 55 The Market Benchmark and Firm Size 57 The Risk-Free Asset Year versus 30-Year Treasuries 57 Income Return 58 Arithmetic versus Geometric Means 59 Appropriate Historical Time Period 60 Does the Equity Risk Premium Revert to Its Mean over Time? 60 Choosing an Appropriate Historical Period 61 A Look at the Historical Results 61 Does the Equity Risk Premium Represent Minority or Controlling Interest? 64 Other Equity Risk Premium Issues 64 Survivorship 64 Equity Risk Premium Puzzle 65 Discounted Cash Flow versus Capital Asset Pricing Model 65 Market Bubbles 65 Change in Investor Attitudes 66 Supply Model 67 Taxes and Equity Risk Premium Calculations 70 Chapter 6 Beta Estimation Methodologies 73 Measuring Beta via Equation 73 Measuring Beta via Regression 74 Market Proxy 75 Historical Time Period 76 Time Interval 77 Regression Statistics and Beta 77 t-statistic 77 R-Squared 78 Standard Error 79 Beta Adjustment Methodologies 80 Blume 80 Vasicek Ibbotson SBBI Valuation Yearbook Morningstar iii

6 Sum Beta (Including Lag) 81 Motivation 81 Possible Measurement Error in Small Company Betas 82 Possible Solution 83 Full Information Beta 84 Levered Beta 85 Unlevered Beta 85 Commercial Beta Sources 86 Chapter 7 Firm Size and Return 89 The Firm Size Phenomenon 89 Construction of the Decile Portfolios 89 Size of the Deciles 90 Presentation of the Decile Data 90 Aspects of the Firm Size Effect 93 Long-Term Returns in Excess of Systematic Risk 94 Further Analysis of the 10th Decile 95 Alternative Methods of Calculating the Size Premia 96 Changing the Market Benchmark 96 Measuring Beta with Sum Beta 97 Annual Data versus Monthly Data 98 Serial Correlation in Small Company Stock Returns 99 Seasonality 101 Possible Explanations for the January Effect 102 Other Criticisms of the Size Premium 102 Bid/Ask Spread 102 Geometric versus Arithmetic Averages 103 Infrequent Trading and Small Stock Betas 103 Transaction Costs 103 Delisted Return Bias 103 Small Stock Returns Are Unpredictable 105 Liquidity and Valuation 108 Liquidity and Stock Returns 108 Liquidity is Not Size 109 iv Table of Contents

7 Chapter 8 Fama-French Three Factor Model 111 Fama-French versus CAPM 112 Stability 113 Chapter 9 International Cost of Capital 117 Calculating the International Cost of Capital 117 International Equity Risk Premia 117 International Cost of Equity Models 118 International CAPM 118 Globally Nested CAPM 120 Country Risk Rating Model 120 Country-Spread Model 121 Relative Standard Deviation Model 121 Conclusion 122 Which International Model Is Best? 122 Appendix A Risk Premia Over Time (S&P 500 Market Benchmark) 123 Appendix B Monthly and Annual Returns on Basic Series 163 Appendix C Key Variables in Estimating the Cost of Capital 197 Glossary 201 Index Ibbotson SBBI Valuation Yearbook Morningstar v

8 Acknowledgements As anyone who has ever written a book knows, it takes the input of a lot of people to produce. This publication was no exception. In this book, we have tried to build upon the previous work in the Ibbotson Stocks, Bonds, Bills, and Inflation (SBBI ) Classic Yearbook produced by Ibbotson Associates for over 25 years. The Ibbotson SBBI Classic Yearbook is based on the original work of Roger Ibbotson and Rex Sinquefield, but many others have contributed to the evolution of that book over the years. Most relevant to the Ibbotson SBBI Valuation Yearbook is the contri butions of Paul Kaplan and Michael Mattson, who wrote the portions of the original Ibbotson SBBI Classic Yearbook that subsequently evolved into the Ibbotson SBBI Valuation Yearbook. Michael Annin and Dominic Falaschetti were the primary authors of the original Ibbotson SBBI Valuation Yearbook published in Each year since then the Valuation Edition has been updated and improved upon thanks to the contributions of many. Michael Barad, formerly of Ibbotson Associates and now vice president of the financial communications business at Morningstar Inc., authored the chapter on business valuation and contributed to the chapter on size premium. Roger Ibbotson, founder of Ibbotson Associates and Professor in Practice at the Yale School of Management, and Paul Kaplan, formerly of Ibbotson Associates and presently vice president of quantitative research at Morningstar, also provided (and continue to provide) valuable insights. Listed below are some of the Morningstar personnel who played a significant role in the timely completion of this publication. Many others within Morningstar, Inc. provided valuable feedback or other contributions that helped in the formulation of this product. Senior Editor James P. Harrington Contributing Editors Sumita Ghosh Warren Miller Jacob J. Munoz Jesse Michael Wahlen Director of Design David Williams Senior Designer Christopher Cantore Production Designer Brian MacKenzie President, Equity Research Group Catherine Odelbo Vice President, Financial Communications Business Michael W. Barad Chairman and CEO Joe Mansueto vi Table of Contents