2016 International Valuation Handbook ‒

Guide to Cost of Capital

Wiley & Sons has partnered with Duff & Phelps, the premier global valuation and corporate finance
advisor with expertise in complex valuation, dispute and legal management consulting, M&A,
restructuring, and compliance and regulatory consulting, to produce a new annual source for this data:
the new International Valuation Handbook ‒ Guide to Cost of Capital.

The 2016 International Valuation Handbook ‒ Guide to Cost of Capital provides the same type of
rigorous country-level analysis previously published in the former Morningstar/Ibbotson International
Cost of Capital Report (discontinued), the former Morningstar/Ibbotson International Cost of Capital
Perspectives Report (discontinued), and the former Morningstar/Ibbotson International Equity Risk
Premia Report (discontinued). The 2016 International Valuation Handbook ‒ Guide to Cost of Capital
ships in August 2016, with data through December 2015 and March 2016, and includes an optional
September Semi-annual Update, with data through June 2016 and September 2016.

The 2016 International Valuation Handbook ‒ Guide to Cost of Capital provides data and methodology
guidance that will enable the reader to assess risk and develop cost of capital estimates on a global
scale.

This publication provides country-level country risk premia (CRPs), Relative Volatility (RV) factors, and
equity risk premia (ERPs), which can be used to estimate country-level cost of equity capital globally,
for up to 188 countries, from the perspective of investors based in up to 56 different countries.*

2016 International Valuation Handbook ‒

Guide to Cost of Capital

Includes optional September Semi-annual Update

*
Depending on the estimation model being employed, and data
availability. Some models do not include estimates for all
countries.
Table of Contents

Table of contents
The table of contents of last year’s 2015
International Valuation Handbook ‒ Guide to Cost of
Capital is provided in the following two pages, for
evaluative purposes. The 2016 version of the book
ships in August 2016 with data through December
2015 and March 2016, and includes an optional
September Semi-annual Update, with data through
June 2016 and September 2016.

The data exhibits in the International Valuation

Handbook – Guide to Cost of Capital include:

 International Equity Risk Premia (ERPs)

 Country Yield Spread Model: Country Risk

Premia (CRPs)

 Relative Volatility Model: Relative Volatility

(RV) Factors

 Erb-Harvey-Viskanta Country Credit Rating

Model: Country Risk Premia (CRPs)
Table of Contents
Acknowledgements xi

Introduction xii
Who Should Use the 2016 International Valuation Handbook – Guide to Cost of Capital xii
New and Notable xiii
About the International Valuation Handbook – Guide to Cost of Capital xiv
ERPs, CRPs, and RVs Are Different, and Are Properly Used Differently xviii
Risk Premia Over the Risk-free Rate and Risk Premia over CAPM (i.e., size premia)
Measure Different Types of Risks xix

Chapter 1 International Cost of Capital – Overview 1-1

Cost of Capital Defined 1-1
Are Country Risks Real? 1-2
Risks Typically Associated with International Investment 1-5
Does the Currency Used to Project Cash Flows Impact the Discount Rate? 1-11
Summary 1-13

Chapter 2 Strengths and Weaknesses of Commonly Used Models 2-1

World (or Global) CAPM 2-1
Single-country Version of the CAPM 2-4
Damodaran’s Local Country Risk Exposure Model 2-5
Alternative Risk Measures (downside risk) 2-6
What Model Should I Use? 2-11

Chapter 3 International Equity Risk Premia 3-1

Description of Data 3-1
Methodology 3-4
Description of Data Series Used 3-8
Currency Translation 3-15
How to Use the International ERP Tables 3-17
Appendix 3A: Additional Sources of International ERP Data 3A-1
Dimson, Marsh, and Staunton Equity Risk Premia Data 3A-1
Pablo Fernandez Equity Risk Premia and Risk-free Rate Surveys 3A-7
Appendix 3B: Additional Sources of Equity Risk Premium Data – Australia 3B-1
Overview of the Australian Dividend Imputation Tax System 3B-1
Australian Equity Risk Premium Under Three Investor Perspectives 3B-2

Chapter 4 Country Yield Spread Model 4-1

Introduction 4-1
Brief Background on Euromoney’s ECR Score 4-2
Investor Perspectives 4-3
Country Yield Spread Model 4-4

2016 International Valuation Handbook – Guide to Cost of Capital ix

Methodology – Country Yield Spread Model 4-6
Using Country Yield Spread Model CRPs to Estimate Base Country-level
Cost of Equity Capital 4-10
Using Country Yield Spread Model CRPs to Estimate Cost of Equity Capital for Use in
Evaluating a Subject Business, Asset, or Project 4-12

Chapter 5 Relative Volatility Model 5-1

Relative Volatility Model 5-1
Investor Perspectives 5-2
Methodology – Relative Volatility Model 5-3
Using Relative Volatility Model RV Factors to Estimate Base Country-level
Cost of Equity Capital 5-5
Using Relative Volatility Model RV Factors to Estimate Cost of Equity Capital for Use in
Evaluating a Subject Business, Asset, or Project 5-7

Chapter 6 Erb-Harvey-Viskanta Country Credit Rating Model 6-1

A Notable Difference with Previous Reports: Country Risk Premia (CRPs) 6-2
Data Sources 6-3
The CCR Model 6-5
Different Investor Perspectives 6-6
Global Cost of Equity Capital – High-level Comparisons 6-8
Presentation of Cost of Capital Data 6-14
Country Risk Premia (CRP) Defined 6-15
How CRPs Are Calculated 6-15
Using CCR Model CRPs to Estimate Base Country-level Cost of Equity Capital 6-17
Using CCR Model CRPs to Estimate Cost of Equity Capital for Use in
Evaluating a Subject Business, Asset, or Project 6-20

Chapter 7 Firm Size and the Cost of Equity Capital in Europe 7-1
Differences in Returns Between Large and Small Companies in Europe 7-1
Countries Included 7-2
Data Sources 7-2
Regional Differences 7-3
Two Types of Risk Premia Examined 7-5
Conclusion 7-11

Data Exhibit 1: International Equity Risk Premia (ERPs)

Data Exhibit 2: Country Yield Spread Model: Country Risk Premia (CRPs)

Data Exhibit 3: Relative Volatility Model: Relative Volatility (RV) Factors

Data Exhibit 4: Erb-Harvey-Viskanta Country Credit Rating Model: Country Risk Premia (CRPs)

Data Exhibit 5: Study of Differences in Returns Between Large and Small Companies in Europe

x
Sample Data Exhibits

Sample Data Exhibits

The 2016 International Valuation Handbook ‒ Guide
to Cost of Capital provides country-level country risk
premia (CRPs), Relative Volatility (RV) factors, and
equity risk premia (ERPs), which can be used to
estimate country-level cost of equity capital globally,
for up to 188 countries, from the perspective of
investors based in up to 56 different countries.

Representative data exhibits from last year’s 2015

International Valuation Handbook ‒ Guide to Cost of
Capital is provided in the following seven pages, for
evaluative purposes. The 2016 version of the book
ships in August 2016 with data through December
2015 and March 2016.
Sample Data Exhibits
Country-level Equity Risk Premia (ERPs)
Country Yield Spread Model: Country Risk Premia (CRPs)*

*
This is an abbreviated version of the Country Yield Spread Model: Country Risk Premium (CRP)
exhibit from the International Valuation Handbook – Guide to Cost of Capital. The hardcover
book’s Country Yield Model CRP exhibits provide country-level CRP estimates for up 188
different countries, from the perspective of investors in the U.S. and Germany.
Relative Standard Deviation Model: Relative Volatility (RV) Factors*

*
This is an abbreviated version of the Relative Standard Deviation Model: Relative Volatility (RV)
Factors exhibit from the International Valuation Handbook – Guide to Cost of Capital. The
hardcover book’s Relative Standard Deviation Model RV Factor exhibits provide country-level
relative volatility factor estimates for up 75 different countries, from the perspective of investors
in the U.S. and Germany.
Country Credit Rating Model: Country Risk Premia (CRPs)*

*
This is an abbreviated version of the Country Credit Rating Model: Country Risk Premium (CRP)
exhibit from the International Valuation Handbook – Guide to Cost of Capital. The hardcover
book’s Country Credit Rating Model CRP exhibits provide country-level CRP estimates for up
179 different countries, from the perspective of 56 different countries.
Additional Duff & Phelps Valuation Data Resources
Published By Wiley

Company-level U.S. Industry-level International International

Data U.S. Data Country-level data Industry-level data

2014, 2015, and 2016 2014, 2015, and 2016 2014, 2015, and 2016 2015 edition available;
editions available editions available editions available 2016 edition available
late summer 2016

To order additional copies of the 2016 International Valuation Handbook – Guide to Cost of Capital or
other Duff & Phelps valuation date resources, please go to: www.wiley.com/go/ValuationHandbooks