BVR. Free Download. Valuation Handbook Guide to Cost of Capital and the Risk Premium Calculator. What It s Worth. Questions From the BVR Webinar

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1 BVR What It s Worth Free Download Questions From the BVR Webinar Valuation Handbook Guide to Cost of Capital and the Risk Premium Calculator Thank you for visiting Business Valuation Resources, the leading provider of quality acquisition data and analysis. For more information about any of our premier valuation products or services, please call (503) ext. 2 or info@bvresources.com. You may also download our complete product brochure at: For permission requests, please permissions@bvresources.com. Business Valuation Resources, LLC 1000 SW Broadway, Suite 1200 Portland, OR (503) info@bvresources.com

2 Questions From the BVR Webinar Valuation Handbook Guide to Cost of Capital and the Risk Premium Calculator February 20, Given the replacement of Morningstar/Ibbotson data, will Duff & Phelps use different sources for its data in the new Valuation Handbook? The same data sources and the same methodology used to produce the data in the former SBBI Valuation Yearbook are used to produce the new 2014 Valuation Handbook: The Center for Research in Security Prices (CRSP) market-cap-based NYSE/AMEX/ NASDAQ indices. Standard & Poor s Research Insight database. SBBI Series from Morningstar s EnCorr database. 2. What is included in the Valuation Handbook from SBBI Valuation Yearbook? The new Valuation Handbook will include 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 Equity Risk Premium Long-horizon expected historical equity risk premium Long-horizon expected supply-side equity risk premium Size Premium 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. 3. Will the Valuation Handbook contain: (1) the market cap ranges associated with deciles including the 10th-decile splits (inside back cover and Table C-1 SBBI); and (2) the decile betas including 10th-decile splits (Table 7-8 in the former SBBI)? Yes, all of that information is included. The 10th decile is split into 10a (and its upper and lower halves 10w and 10x) and 10b (and its upper and lower halves 10y and 10z), using the same data and the same methodology that were used in the former SBBI Valuation Yearbook. All of the market cap ranges will be included, as usual. And yes, all of the data in the 2013 SBBI Valuation Yearbook s Table 7-8 are presented in the 2014 Valuation Handbook s Exhibit 7.3. OLS, annual, and sum betas for each of the deciles and size groupings (3-5, 6-8, 9-10) and for the 10thdecile split are in the 2014 Valuation Handbook. 4. What is included in the Valuation Handbook from the Duff & Phelps Risk Premium Report? The A Exhibits (risk premia over the risk-free rate) for use in the build-up method, the B Exhibits (size premia) for use in the CAPM, the C Exhibits (comparative risk statistics), the D Exhibits (fundamental risk-based premias) for use in the build-up method, and the H Exhibits for highfinancial-risk companies. February 20, 2014 Business Valuation Resources 1

3 5. Will the Valuation Handbook be published annually? Yes. We intend to publish the Handbook annually on the same schedule as the former SBBI Valuation Yearbook (data through year-end, delivered in March). 6. Will information similar to the previous Morningstar industry risk premia analysis be available? The 2014 Valuation Handbook will include industry risk premia (by SIC) for use within the build-up method. 7. What is an industry risk premium again? How is it used? The IRP is simply a full-information beta scaled around 0 so that it can be added as an up or down adjustment when using the build-up method. The ERP is used as an input in transforming the full-information beta into an IRP, but only as a way of scaling the full-information beta around 0. In the former SBBI Valuation Yearbook and in the new Valuation Handbook, the IRPs are calculated using the long-term historical ERP (this is exactly how it was done in the SBBI), and we also included IRPs calculated using other ERP estimates. 8. SBBI historically provided a single industry premium per SIC code was that industry risk premium calculated using the historical ERP or supply-side ERP? The SBBI IRPs were calculated using the long-term historical ERP that was published on the back page. The supply-side ERP was not used for this purpose. In the new 2014 Valuation Handbook, we calculate industry risk premia three ways: (i) using the historical ERP, just as was done in the former SBBI Yearbook; (ii) using the supply-side ERP; and (iii) using the Duff & Phelps recommended ERP. In addition, we also supply the actual full-information beta, so that the valuation practitioner can calculate his or her own custom industry risk premium. All of this is fully explained (with examples) in the new Handbook. 9. Will there be a cost of capital offering by SIC code? Morningstar offered an annual book and a database to access industry cost of capital tear sheets. Morningstar also updated these quarterly. Will Duff & Phelps have a similar offering? Morningstar switched off its website Cost of Capital Resources Center (CCRC) on Dec. 31, The CCRC site included individual company beta tear sheets, individual industry tear sheets by SIC, and the three Ibbotson international cost of capital reports. Duff & Phelps is exploring the creation of replacements for these very useful and popular reports. 10. Since the SIC codes have not been updated since 1987, why are the NAICS codes not used instead? In the first edition of the new Valuation Handbook, we used SICs, just as the former SBBI book used. SIC (industry) codes are what have historically been used in the Ibbotson products. Duff & Phelps is exploring using additional industry designations (NAICS, GICS) in the future, in addition to SICs. 11. Can this source be used for the optimal debt-to-equity ratio by industry, which used to appear in Morningstar Cost of Capital Quarterly? If not, do you know of any other sources? The debt-to-equity capital ratios by industry are not calculated in the 2014 Valuation Handbook. This type of industry information was previously published in the Ibbotson Cost of Capital Yearbook, and some debt information was published in more recent SBBI Yearbooks. Duff & Phelps is exploring the possibility of supplying the industry data previously published in the Ibbotson Cost of Capital Yearbook (and its quarterly updates) as well. 2 Business Valuation Resources February 20, 2014

4 12. At this point, is there (or will there be) a debtto-total capital ratio calculation by industry? This is not available in the 2014 Valuation Handbook. However, this and other capabilities will likely be added over the coming year. 13. Do you include any information on the effective tax rates built into the SBBI data? No. 14. Will the forthcoming company beta calculator include the ability to calculate betas as of historical dates? If so, how far back will the data go? We would likely enable the beta calculator to calculate individual company betas and peer group betas on historical dates. So yes. 15. What about the historical SBBI data and historical Duff & Phelps data? In purchasing the Calculator, will users have access to the history? This is important because, often, in a litigation setting, we work more than a year in the past. The Duff & Phelps historical data are available for all years from 1996 to present. The former SBBI data are available in the 2014 Valuation Handbook through the year ending Dec. 31, 2013, and are intended to be used for 2014 valuation dates. Next year s 2015 Valuation Handbook will include data through Dec. 31, 2014, and will be for 2015 valuation dates. We presently do not have the rights to publish SBBI Valuation Yearbook data from previous years. 16. Are ERPs based on 20-year treasuries as they are in SBBI, or some other term (10 year)? The same data and methodology used to calculate the SBBI valuation data were used to create the 2014 Valuation Handbook, including the exact same SBBI data series that was previously used in the SBBI Yearbook. The long-term historical ERP is based on the average annual difference between the S&P 500 total return index and the SBBI long-term (20-year) government bond income return. This is exactly how it was done in the former SBBI Yearbook. 17. Will the new Valuation Handbook contain any information on international cost of capital? The 2014 Valuation Handbook will not contain this information. The Cost of Capital: Applications and Examples, 5th ed. by Shannon P. Pratt and Roger J. Grabowski (John Wiley & Sons, 2014) contains a detailed discussion of various models and data sources in Chapter 39. However, next year is a different story. We are considering adding a discussion of international cost of capital in the 2015 Valuation Handbook. Also, Duff & Phelps is exploring publishing international cost of capital data to replace the (now discontinued) Ibbotson International Cost of Capital Report, Ibbotson International Cost of Capital Perspectives Report, and Ibbotson International Equity Risk Premium Report. 18. Cost of Capital: Applications and Examples and the Valuation Handbook will ship this spring. What do we do if we have Dec. 31, 2013, valuations that must be done prior to April? The new 2014 Valuation Handbook is on schedule to ship March 17, 2014 (the same schedule that the former SBBI Valuation Yearbook was shipped). On February 28, Duff & Phelps sent a PDF document that includes key year-end data to all distributors, and all customers who have preordered the 2014 Valuation Handbook prior to February 28, and customers who preorder after February 28, will automatically be sent this PDF document (via ). In the past, Morningstar/Ibbotson ed this key year-end data around the end of February to customers who preordered the book, to tide them over while the actual hardcover book is being printed, and we will continue this tradition. 19. Did the PDF that was released February 28 include industry risk premia? Morningstar/Ibbotson s preorder PDF document never included the IRPs but did include the size premia and other key valuation data February 20, 2014 Business Valuation Resources 3

5 that were published on the back page of the SBBI Valuation Yearbook. Our PDF will include the exact same back page information as the previous document sent out by Morningstar. Like the former Morningstar document, it will not include the IRP list. 20. I see on BVR s website ( com/dp) that the one-year-subscription to the Risk Premium Calculator includes the 2014 Valuation Handbook. Will hard copy of the Handbook be provided for the $519 subscription fee? Yes. With a subscription to the Risk Premium Calculator, you will receive the 2014 Valuation Handbook. You can purchase the Calculator, plus Handbook, or the Handbook on its own at Is it possible to evaluate the Calculator with say prior year data to see how it works? Yes, you can purchase a one-time use to test drive the Calculator. If you are satisfied and would like to purchase a year-long subscription, BVR will apply your one-time use purchase toward the full price of the Calculator. 22. I am already a subscriber to Duff & Phelps Risk Premium Data and Calculator. How does this affect my subscription? On Feb. 28, 2014, the Duff & Phelps data were updated through Dec. 31, 2013, in the Calculator. Around the end of March 2014, the Calculator will also be updated with SBBI-like information. To summarize, you will receive the same information you received before, plus enhanced data. 23. Can the 2014 Valuation Handbook be purchased separately from Cost of Capital: Applications and Examples? What is the cost of each? Yes. The 2014 Valuation Handbook is available for purchase at valuationhandbook. Cost of Capital: Applications and Examples is available for purchase at To learn more about the Valuation Handbook and the Risk Premium Calculator, contact a BVR Account Executive at , ext. 2 or sales@bvresources.com. 4 Business Valuation Resources February 20, 2014

6 BVR What It s Worth The wait is over! 2014 Valuation Handbook Guide to Cost of Capital and Risk Premium Calculator Business appraisers turn to BVR s Cost of Capital Resource Center to get the latest and most up-to-date valuation data and analysis possible. BVR is committed to continually furthering and adding to the analysis available, and to providing the most useful resources. Check out these highly-anticipated new and updated tools Valuation Handbook Guide to Cost of Capital Market Results Through 2013 Valuation Handbook - Guide to Cost of Capital (Now available! $ $9.95 S&H) BVR is excited to announce the availability of the 2014 Valuation Handbook Guide to Cost of Capital and the Risk Premium Calculator update, both published by Duff & Phelps. The new Valuation Handbook, available as a print publication, includes two sets of valuation data: Critical year-end data previously available in the SBBI Valuation Yearbook; and Data available in Duff & Phelps Risk Premium Report Risk Premium Calculator (Includes Valuation Handbook) (2013 data now available $519.00/year) Designed by Roger Grabowski and James Harrington, the Risk Premium Calculator is a web-based model that offers defensible cost of capital measures, particularly for small target companies. Users can enter 1-18 inputs and the online Calculator instantly delivers a fully customizable Executive Summary in Microsoft Word format that includes sourcing, key inputs, and a concluded range of cost of equity capital estimates using both the buildup and CAPM methods. In addition, a detailed record of all inputs, outputs, and calculations is exported to a Support and Detail Microsoft Excel workbook. Use of the Calculator assures accuracy and prevents spreadsheet errors. Learn more and order today! bvresources.com/costofcapital (503) or info@bvresources.com Business Valuation Resources, LLC SW Broadway, Suite 1200, Portland, OR PRIOR1804