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A Q&A with Roger Grabowski, Managing Director with Duff& Phelps' Valuation Advisory Services
What is the Cost of CapitalNavigator?
The Cost of Capital Navigator is an interactive, web-basedplatform that guides finance professionals through the steps ofcomputing cost of capital, a key component of any valuationanalysis, in accordance with best practices and the latesttheory.
The Cost of Capital Navigator replaces the Duff & PhelpsValuation Handbook – U.S. Guide to Cost of Capital,which includes risk-free rates, equity risk premia, size premia,risk premia over the risk-free rate, and industry risk premia fromtwo essential valuation data sets: the CRSP Deciles Size Study andthe Risk Premium Report Study. Analysts have relied on that datafor years to estimate cost of equity capital using both the capitalasset pricing model, or CAPM, and various build-up models.
The other three Valuation Handbooks (Valuation Handbook– U.S. Industry Cost of Capital, Valuation Handbook –International Guide to Cost of Capital, Valuation Handbook –International Industry Cost of Capital) will be migrated tothe new online platform beginning later in 2018.
Why did Duff & Phelps develop the Cost ofCapital Navigator?
Estimating cost of capital requires matching risk of the subjectbusiness with the appropriate return. In the case of theValuation Handbook – U.S. Guide to Cost of Capital,we have found that many users often struggle to fully takeadvantage of the wealth of data contained in it. Matching risk andreturn takes time. For example, understanding the application ofsize premia is more than simply picking a number from a table.Appropriate size premia selection requires an understanding of riskcharacteristics. The Cost of Capital Navigator is designed toassist the analyst with examining the characteristics of thesubject company and then selecting the cost of capital data thatbest matches the risk profile. It is as if one of the ValuationHandbook co-authors were sitting alongside the analyst guiding themthrough the estimation process. The Cost of Capital Navigator helpsusers reduce errors and time spent on their analysis, and providescomprehensive documentation.
The Cost of Capital Navigator also improves user access to dataas fast as the data is available. Analysts want access to the mostup-to-date data at any time and from an array of devices. The shiftfrom traditional books to a digital platform ensures that users areaccessing the data they care about as quickly as Duff & Phelpscan make it available. We are now able to make our data availableto analysts much faster than was previously possible through printdelivery.
What valuation data does the Cost of CapitalNavigator include?
The Cost of Capital Navigator includes the (i) size premia, (ii)industry risk premia, (iii) equity risk premia (ERPs), (iv)risk-free rates, and (v) other risk premia from two essentialvaluation data sets that can be used to estimate cost of equitycapital using the capital asset pricing model (CAPM) and variousbuild-up methods, using two separate studies:
- The CRSP Deciles SizeStudy1, and
- The Risk Premium ReportStudy2.
Currently, both of these studies are updated with data throughDecember 31, 2017. As of 2018, all data-years from 1999 through2018 (data year 2018 includes the December 2017 data plus upcomingquarterly updates through 2018) are available in the Cost ofCapital Navigator.
The valuation data and information in the Cost of CapitalNavigator is the actual "as published" valuation datafrom the source publications.3
What are the subscription options that areavailable?
Duff & Phelps offers three subscription options: Basic, Proand Enterprise. The Basic subscription provides data for the twomost recent data years (i.e., 2017 and 2018) while the Prosubscription provides all data years, the 2018 data year plushistorical data for all data years going back to 1999. TheEnterprise license is the Pro subscription for companies that havemore than 25 users.
Are the content, examples, FAQs, and methodologythat were available in the hardcover Valuation Handbook– U.S. Guide to Cost of Capital available in the newonline Cost of CapitalNavigator?
Yes, the content, examples, frequently asked questions (FAQs),and methodology, from each of the Valuation Handbooks –U.S. Guide to Cost of Capital from 2014 forward, including thenew content for the 2018 data year are available in the Cost ofCapital Navigator, organized by chapter, fully searchable,downloadable, and printable.
Does the Cost of Capital Navigator providecomprehensive documentation?
Yes. The Cost of Capital Navigator is designed to guide theanalyst through the data selection process in an efficient manner,providing auditable documentation at each step of the selectionprocess for internal review and workpaper retention. All of thisinformation is exportable to a PDF document or Excelspreadsheet.
Are users' inputs and results confidential inthe Cost of Capital Navigator?
Yes. Data confidentiality and security are strictly enforced withinthe system. Accounts are accessible only to the account owner. Onlythe account owner can view or modify an estimate.
What additional features are being planned for theCost of Capital Navigator?
We will be adding sample report text for the analyst tocustomize that explains the sources of the data and the analysisprocess.
We will also be introducing a new workpaper package, which willprovide sources of information, as well as brief explanations forall the inputs, assumptions, and methodologies employed whencalculating a discount rate using the Cost of Capital Navigator.This package can be used by valuation professionals and companiesto assist in their response to requests submitted by audit reviewteams related to how discount rates were estimated based on theCost of Capital Navigator.
We will also be adding a module that will allow the analyst touse the data now published in the Valuation Handbook –U.S. Industry Cost of Capital to benchmark, augment, support,and strengthen the analyst's own custom analysis of theindustry in which a subject business, business ownership interest,security, or intangible asset resides.
Finally, we will be adding an Excel plug-in that will allowsubscribers at the Pro and Enterprise levels to import any of thedata available in the Cost of Capital Navigator directly into a newspreadsheet, or into their existing models.
How can I learn more about and purchase the Cost ofCapital Navigator?
Visit dpcostofcapital.com
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
