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Valuation Handbook — International Guide to Cost of Capital: 2022 Summary Edition

Valuation Handbook



The cost of capital is the expected rate of return that the market requires in order to attract funds to a particular investment and is one of the most important concepts in finance. It may be described in simple terms as the expected return appropriate for the expected level of risk and is also commonly called the discount rate, the expected return, or the required return.

There are three broad valuation approaches: (i) the income approach, (ii) the market approach, and (iii) the cost or asset-based approach. The country risk premia (CRPs), equity risk premia (ERPs), and relative volatility (RVs) can be used to develop cost of capital estimates for use in income approach-based valuation methods. Of the three aforementioned approaches to estimating value, only the income approach typically requires cost of capital estimates.

The cost of capital is a critical input used in income approaches to equate the future economic benefits (typically measured by projected cash flows) of a business, business ownership interest, security, or intangible asset to present value. The income approach is most often applied through a discounted cash flow (DCF) model.

A basic insight of capital market theory, that expected return is a function of risk, still holds when dealing with cost of equity capital in a global environment. Estimating a proper cost of capital (i.e., a discount rate) in developed countries, where a relative abundance of market data and comparable companies exist, requires a high degree of expertise. Estimating cost of capital in less-developed (i.e., “emerging”) economies can present an even greater challenge, primarily due to lack of data (or poor data quality) and the potential for magnified financial, economic, and political risks. A good understanding of cost of capital concepts is, therefore, essential for making global investment decisions.


About the Author(s)

James Harrington
James P. Harrington

James P. Harrington is a director at Duff & Phelps, a Kroll Business. James provides technical support on client engagements involving cost of capital and business valuation matters, and is a leading contributor to Duff & Phelps’s efforts in the development of studies, surveys, online content and tools, and firm-wide valuation models. James is co-author of the Duff & Phelps “Valuation Handbook” series with colleagues Carla S. Nunes and Roger J. Grabowski.
Previously, James was director of valuation research in Morningstar's Financial Communications Business where he led the group that produced the Stocks, Bonds, Bills, and Inflation® (SBBI®) Valuation Yearbook, Stocks, Bonds, Bills, and Inflation® (SBBI®) Classic Yearbook, Cost of Capital Yearbook, various international cost of capital reports, and created a website dedicated to cost of capital issues.

Carla Nunes CFA

Carla S. Nunes, CFA, is a managing director in the Office of Professional Practice of Duff & Phelps, A Kroll Business. In this role, Ms. Nunes provides firm-wide technical guidance on a variety of valuation, financial reporting and tax issues. She also coauthors Duff & Phelps’s annual U.S. and European Goodwill Impairment Studies. In addition, Ms. Nunes is the global leader of Duff & Phelps’s Valuation Digital Solutions group, which produces cost of capital thought leadership content and data housed in the Cost of Capital Navigator. In 2011, she completed a one-year rotation in Duff & Phelps' London office, where she promoted the firm's IFRS education efforts and marketing initiatives, as well dealing with IFRS implementation issues. She is a frequent speaker in webinars and conferences on the topics of cost of capital, goodwill impairment and valuation in general.

Prior to this role, Ms. Nunes was part of the Valuation Advisory Services business unit, performing engagements primarily for financial reporting and tax purposes at Duff & Phelps and its predecessor firms, PricewaterhouseCoopers and Standard & Poor’s. She has conducted numerous business and asset valuations for a variety of purposes, including purchase price allocations, goodwill impairment testing, M&A, corporate tax restructuring and debt analysis. Ms. Nunes has been involved in multiple valuation assignments for a wide range of industries, including pharma & biotech, healthcare, vitamin retail, specialty chemicals, industrial manufacturing and gaming & hospitality. She has substantial experience with cross-border valuations, working with multinational corporations to address complex tax, international cost of
capital and foreign exchange issues.

Ms. Nunes is a Kroll Institute Fellow, a Practitioner Director in the Financial Management Association (FMA), and a member of the Education Committee of the International Institute of Business Valuers (iiBV).

Ms. Nunes received her MBA in finance from the University of Rochester's Simon School, an honors degree in business administration from Lisbon's School of Economics and Management (ISEG Lisbon) and completed coursework for a Masters of Taxation from Villanova University School of Law. Additionally, she is a CFA charterholder and has passed the exam and fulfilled all the requirements for the Certified in Entity and Intangibles Valuations (CEIV) credential.

Anas Aboulamer
Anas Aboulamer

Anas Aboulamer is a director of research working within the Valuation Digital Solutions team at Duff and Phelps. He has more than 15 years of experience in economic and financial research, specializing in the area of empirical assets pricing and cost of capital. Dr. Aboulamer has authored a number of peer-reviewed journal articles on financial markets and presented his research at multiple conferences. Previously, he worked as a senior research consultant for the macro research group at Brandywine Global Asset Management and as a currency analyst for BCA Research. Dr. Aboulamer has taught finance in executive programs in North America, Europe and the Middle East and was a visiting assistant professor of finance at Smeal College of Business at The Pennsylvania State University. Dr. Aboulamer holds a PhD in finance from the joint PhD program of Concordia, McGill, and HEC Montréal in Canada.

Roger J. Grabowski
Roger J. Grabowski

Roger J. Grabowski is a managing director at Duff & Phelps, a Kroll Business. Previously, he was a managing director at Standard & Poor's corporate value consulting practice and a partner at PricewaterhouseCoopers LLP and one of its predecessor firms, Price Waterhouse, where he founded the US valuation services practice and managed the real estate appraisal practice. Mr. Grabowski has directed valuations of businesses, interests in businesses, intellectual property, intangible assets, real property, and machinery and equipment. He is the coauthor of Cost of Capital: Applications and Examples, The Lawyer's Guide to Cost of Capital, and Cost of Capital in Litigation: Applications and Examples. Mr. Grabowski has written the annual Duff & Phelps Risk Premium Report and is the coauthor of the 2014 Valuation Handbook: Guide to Cost of Capital. He teaches courses for the American Society of Appraisers, including Cost of Capital, a course he developed.