Best Practices Est WACCupdate

15 BROTHERSON ET AL.
BEST PRACTICES IN ESTIMATING THE COST OF CAPITAL: AN UPDATE

15
Best Practices in Estimating the Cost
of Capital: An Update
W. Todd Brotherson, Kenneth M. Eades, Robert S. Harris, and Robert C. Higgins
Theories on cost of capital have been around for decades.
Unfortunately for practice, the academic discussions typically
stop at a high level of generality, leaving important questions
for application unanswered. Recent upheavals in hnancial
markets have onlv made the practitioners task more difhcult.
This paper updates our earlier work on the state of the art
in cost of capital estimation to identify current best practices
that emerge. Unlike many broadly distributed multiple
choice or hll-in-the-blank survevs, our hndings are based
on conversations with practitioners at highly regarded
corporations and leading hnancial advisors. We also report
on advice from best-selling textbooks and trade books.
We hnd close alignment among all these groups on use of
common theoretical frameworks to estimate the cost of
capital and on manv aspects of estimation. We hnd large
variation, however, for the joint choices of the risk-free rate
of return, beta and the equity market risk premium, as well
as for the adfustment of capital costs for specihc investment
risk. When compared to our 1998 publication, we hnd that
practice has changed some since the late 1990s but there
is still no consensus on important practical issues. The
paper ends with a synthesis of messages from best practice
companies and hnancial advisors and our conclusions.
The authors thank Bob Bruner for collaboration on prior research. His
duties as a dean, however, prevent his joining this effort. We thank MSCI
for sharing Barra data. The research would not have been possible without
the cooperation of the companies and hnancial advisors surveved. These
contributions notwithstanding, any errors remain the authors.
W. Todd Brotherson is Assistant professor at Southern Virginia University
in Buena Vista, VA. Kenneth M. Eades is a Professor at the Darden
Graduate School of Business Administration at the University of Virginia
in Charlottesville, VA. Robert S. Harris is a Professor at the Darden
Graduate School of Business Administration at the University of Virginia in
Charlottesville, VA. Robert C. Higgins is Professor Emeritus at the Foster
School of Business at the University of Washington in Seattle, WA.
Cost of capital is so critical to things we do, and CAPM
has so many holes in itand the books dont tell you which
numbers to use so at the end of the day, you wonder a bit
if youve got a solid number. Am I fooling myself with this
well-disciplined, quantifable number?
- A corporate survey participant
Over the years, theoretical developments in fnance
converged into compelling recommendations about the cost
of capital to a corporation. By the early 1990s, a consensus
had emerged prompting descriptions such as traditional...
textbook...appropriate, theoretically correct, a useful
rule of thumb and a good vehicle. In prior work with
Bob Bruner, we reached out to highly regarded frms and
fnancial advisors to see how they dealt with the many issues
of implementation.
1
FiIteen years have passed since our frst
study. We revisit the issues and see what now constitutes
best practice and what has changed in both academic
recommendations and in practice.
We present evidence on how some oI the most fnancially
sophisticated companies and fnancial advisors estimate
capital costs. This evidence is valuable in several respects.
First, it identifes the most important ambiguities in the
application of cost of capital theory, setting the stage for
productive debate and research on their resolution. Second, it
helps interested companies to benchmark their cost of capital
estimation practices against best-practice peers. Third, the
evidence sheds light on the accuracy with which capital costs
can be reasonably estimated, enabling executives to use the
estimates more wisely in their decision-making. Fourth, it
1
To provide a self-contained article we draw directly on portions of our
earlier work, Bruner, Eades, Harris, and Higgins (1998), which also
discusses surveys fromearlier years.
16 JOURNAL OF APPLIED FINANCE NO. 1, 2013
enables teachers to answer the inevitable question, 'But how
do companies really estimate their cost of capital?
The paper is part of a lengthy tradition of surveys of
industry practice. For instance, Burns and Walker (2009)
examine a large set of surveys conducted over the last
quarter century into how US companies make capital
budgeting decisions. They fnd that estimating the weighted
average cost of capital is the primary approach to selecting
hurdle rates. More recently, J acobs and Shivdasani (2012)
report on a large-scale survey oI how fnancial practitioners
implement cost of capital estimation. Our approach differs
from most papers in several important respects. Typically
studies are based on written, closed-end surveys sent
electronically to a large sample oI frms, oIten covering a
wide array of topics, and commonly using multiple choice
or fll-in-the-blank questions. Such an approach typically
yields low response rates and provides limited opportunity
to explore subtleties of the topic. For instance, J acobs and
Shivdasani (2012) provide useful insights based on the
Association for Finance Professionals (AFP) cost of capital
survey. While the survey had 309 respondents, AFP (2011,
page 18) reports this was a response rate of about 7% based
on its membership companies. In contrast, we report the
result of personal telephone interviews with practitioners
from a carefully chosen group of leading corporations and
fnancial advisors. Another important diIIerence is that many
existing papers Iocus on how well accepted modern fnancial
techniques are among practitioners, while we are interested
in those areas oI cost oI capital estimation where fnance
theory is silent or ambiguous and practitioners are left to
their own devices.
The following section gives a brief overview of the
weighted-average cost of capital. The research approach
and sample selection are discussed in Section II. Section III
reports the general survey results. Key points of disparity are
reviewed in Section IV. Section V discusses further survey
results on risk adjustment to a baseline cost of capital, and
Section VI highlights some institutional and market forces
affecting cost of capital estimation. Section VII offers
conclusions and implications Ior the fnancial practitioner.
I. The Weighted-Average Cost of Capital
A key insight Irom fnance theory is that any use oI capital
imposes an opportunity cost on investors; namely, funds are
diverted Irom earning a return on the next best equal-risk
investment. Since investors have access to a host oI fnancial
market opportunities, corporate uses of capital must be
benchmarked against these capital market alternatives.
The cost oI capital provides this benchmark. Unless a frm
can earn in excess of its cost of capital on an average-risk
investment, it will not create economic proft or value Ior
investors.
A standard means of expressing a companys cost of
capital is the weighted-average of the cost of individual
sources of capital employed. In symbols, a companys
weighted-average cost of capital (or WACC) is:
WACC = (W
debt
(1-t) K
debt
) + (W
equity
K
equity
), (1)
where:
K = component cost of capital.
W = weight of each component as percent of total capital.
t = marginal corporate tax rate.
For simplicity, this formula includes only two sources of
capital; it can be easily expanded to include other sources
as well.
Finance theory offers several important observations
when estimating a companys WACC. First, the capital costs
appearing in the equation should be current costs refecting
current fnancial market conditions, not historical, sunk costs.
In essence, the costs should equal the investors` anticipated
internal rate oI return on Iuture cash fows associated with
each form of capital. Second, the weights appearing in the
equation should be market weights, not historical weights
based on often arbitrary, out-of-date book values. Third,
the cost oI debt should be aIter corporate tax, refecting the
benefts oI the tax deductibility oI interest.
Despite the guidance provided by fnance theory, use oI
the weighted-average expression to estimate a companys
cost of capital still confronts the practitioner with a number
oI diIfcult choices.
2
As our survey results demonstrate, the
most nettlesome component of WACC estimation is the cost
oI equity capital; Ior unlike readily available yields in bond
markets, no observable counterpart exists Ior equities. This
forces practitioners to rely on more abstract and indirect
methods to estimate the cost oI equity capital.
II. Sample Selection
This paper describes the results of conversations with
leading practitioners. Believing that the complexity of the
subject does not lend itselI to a written questionnaire, we
wanted to solicit an explanation oI each frm`s approach
told in the practitioners own words. Though our telephone
interviews were guided by a series oI questions, the
conversations were suIfciently open-ended to reveal many
subtle differences in practice.
Since our focus is on the gaps between theory and
application rather than on average or typical practice, we
2
Even at the theoretical level, the use of standard net present value (NPV)
decision rules (with, for instance, WACC as a discount rate) does not
capture the option value of being able to delay an irreversible investment
expenditure. As a result, a frm may fnd it better to delay an investment
even if the current NPV is positive. Our survey does not explore the ways
frms deal with this issue; rather we Iocus on measuring capital costs.
17 BROTHERSON ET AL. BEST PRACTICES IN ESTIMATING THE COST OF CAPITAL: AN UPDATE
aimed to sample practitioners who were leaders in the feld.
We began by searching for a sample of corporations (rather
than investors or fnancial advisors) in the belieI that they
had ample motivation to compute WACC carefully and to
resolve many of the estimation issues themselves. Several
publications oIIer lists oI frms that are well-regarded in
fnance; oI these, we chose Fortunes 2012 listing of Most
Admired Companies.
3
Working with the Hay Group, Fortune
creates what it terms 'the defnitive report card on corporate
reputations. Hay provided us with a listing of companies
ranked by the criterion wise use of assets within industry.
To create our sample we only used companies ranked frst or
second in their industry. We could not obtain raw scores that
would allow comparisons across industries.
The 2012 Fortune rankings are based on a survey of 698
companies, each of which is among the largest in its industry.
For each of 58 industry lists, Hay asks executives, directors,
and analysts to rate companies in their own industry on a set
oI criteria. Starting with the top two ranked frms in each
industry, we eliminated companies headquartered outside
3
For instance, Institutional Investor publishes lists oI frms with the best
ChieI Financial OIfcers (CFOs), or with special competencies in certain
areas. We elected not to use such lists because special competencies might
not indicate a generally excellent fnance department, nor might a stellar
CFO. The source used by Bruner et al. (1998) is no longer published. Our
approach, however, mirrors that earlier work.
Table I. Three Survey Samples
Full titles of textbooks and trade books are listed in the references at the end of this paper.
Company Sample Advisor Sample Textbook/Trade Book
Sample
AmerisourceBergen
Caterpillar
Chevron
Coca Cola
Costco Wholesale
IBM
International Paper
Intuit
J ohnson Controls
PepsiCo
Qualcomm
Sysco
Target
Texas Instruments
Union Pacifc
United Technologies
UPS
W.W. Grainger
Walt Disney
Bank of America Merrill
Lynch
Barclays Capital
Credit Suisse
Deutsche Bank AG
Evercore Partners
Goldman Sachs & Co.
Greenhill & Co, LLC
J P Morgan
Lazard
Morgan Stanley
UBS
Textbooks
Brigham and Ehrhardt (2013)
Ross, Westerfeld and JaIIe (2013)
Brealey, Myers, and Allen (2011)
Higgins (2012)
Trade books
Koller, Goedhart, and Wessels (2005)
Ibbotson (2012)
North America (eight excluded).
4
We also eliminated the
one frm classifed as a regulated utility (on the grounds
that regulatory mandates create unique issues Ior capital
budgeting and cost of capital estimation) and the seven
frms in fnancial services (inclusive oI insurance, banking,
securities and real estate). Forty-seven companies satisfed
our screens. Of these, 19 frms agreed to be interviewed and
are included in the sample given in Table I. Despite multiple
concerted attempts we made to contact appropriate personnel
at each company, our response rate is lower than Bruner,
Eades, Harris, and Higgins (1998) but still much higher than
typical cost of capital surveys. We suspect that increases in
the number of surveys and in the demands on executives
time infuence response rates now versus the late 1990s.
We approached corporate oIfcers frst with an email
explaining our research. Our request was to interview
the individual in charge oI estimating the frm`s WACC.
We then arranged phone conversations. We promised our
interviewees that, in preparing a report on our fndings, we
would not identify the practices of any particular company
by namewe have respected this promise in the presentation
4
This screen was also used in Bruner et al. (1998). Our reasons for
excluding these frms were the increased diIfculty oI obtaining interviews,
and possible diIfculties in obtaining capital market inIormation (such as
betas and equity market premiums).
that follows.
In the interest of assessing the practices of the broader
community oI fnance practitioners, we surveyed two other
samples:
Financial advisors. Using a league table of merger and
acquisition advisors Irom Thomson`s Securities Data
Commission (SDC) Mergers and Acquisitions database,
we drew a sample of the most active advisors based on
aggregate deal volume in M&A in the US for 2011. Of
the top twelve advisors, one frm chose not to participate
in the survey, giving us a sample of eleven.
We applied approximately the same set oI questions
to representatives oI these frms` M&A departments.
5

Financial advisors face a variety of different pressures
regarding cost of capital. When an advisor is represent-
ing the sell side of an M&A deal, the client wants a high
valuation but the reverse may be true when an advisor
is acting on the buy side. In addition, banks may be en-
gaged by either side of the deal to provide a Fairness
Opinion about the transaction. We wondered whether the
pressures oI these various roles might result in fnancial
advisors using assumptions and methodologies that re-
sult in different cost of capital estimates than those made
by operating companies. This proved not to be the case.
Textbooks and Trade books. In parallel with our prior
study, we focus on a handful of widely-used books. From
a leading textbook publisher we obtained names of the
four best-selling, graduate-level textbooks in corporate
fnance in 2011. In addition, we consulted two popular
trade books that discuss estimation of the cost of capital
in detail.
III. Survey Findings
Table II summarizes responses to our questions and shows
that the estimation approaches are broadly similar across the
three samples in several dimensions:
Discounted Cash Flow (DCF) is the dominant investment
evaluation technique.
WACC is the dominant discount rate used in DCF analy- WACC is the dominant discount rate used in DCF analy-
ses.
Weights are based on market not book value mixes of debt
and equity.
6
5
Specifc questions diIIer, refecting the Iacts that fnancial advisors
inIrequently deal with capital budgeting matters and that corporate fnancial
oIfcers inIrequently value companies.

6
The choice between target and actual proportions is not a simple one.
Because debt and equity costs depend on the proportions oI each employed,
it might appear that the actual proportions must be used. However, if the
frm`s target weights are publicly known and iI investors expect the frm
to move to these weights, then observed costs oI debt and equity may
anticipate the target capital structure.
The after-tax cost of debt is predominantly based on mar-
ginal pretax costs, and marginal tax rates.
7
The Capital Asset Pricing Model (CAPM) is the domi- The Capital Asset Pricing Model (CAPM) is the domi-
nant model Ior estimating the cost oI equity. Despite
shortcomings oI the CAPM, our companies and fnancial
advisors adopt this approach. In fact, across both compa-
nies and fnancial advisors, only one respondent did not
use the CAPM.
8
These practices parallel many oI the fndings Irom
our earlier survey. First, the 'best practice frms show
considerable alignment on many elements of practice.
Second, they base their practice on fnancial economic
models rather than on rules of thumb or arbitrary decision
rules. Third, the fnancial Irameworks oIIered by leading
texts and trade books are fundamentally unchanged from
our earlier survey.
On the other hand, disagreements exist within and among
groups on matters of application, especially when it comes
to using the CAPM to estimate the cost oI equity. The
CAPM states that the required return (K) on any asset can
be expressed as:
K =R
f
+ (R
m
-R
f
), (2)
where:
R
f
= interest rate available on a risk-free asset.
R
m
= return required to attract investors to hold the
broad market portfolio of risky assets.
the relative risk of the particular asset.
According to CAPM then, the cost oI equity, K
equity
, for
a company depends on three components: returns on risk-
free assets (R
f
), the stock`s equity 'beta which measures
risk of the companys stock relative to other risky assets
( 1.0 is average risk), and the market risk premium
(R
m
- R
f
) necessary to entice investors to hold risky assets
generally versus risk-free instruments. In theory, each of
these components must be a forward-looking estimate. Our
survey results show substantial disagreements, especially in
terms of estimating the market risk premium.
7
In practice, complexities of tax laws such as tax-loss carry forwards
and carry backs, investment tax credits, state taxes, and international tax
treatments complicate the situation. Graham and Mills (2008) estimate
effective marginal tax rates. While most companies in their sample hit the
statutory marginal rate, the average effective marginal tax rate turned out
to be about 5% lower.

8
See, for instance, Brealey, Myers, and Allen (2011) pgs. 196-199 for
a high-level review of some of the empirical evidence and the textbook
authors` rationale Ior continued use oI the CAPM.
T
a
b
l
e

I
I
.

G
e
n
e
r
a
l

S
u
r
v
e
y

R
e
s
u
l
t
s
Q
u
e
s
t
i
o
n
s
C
o
r
p
o
r
a
t
i
o
n
s
F
i
n
a
n
c
i
a
l

A
d
v
i
s
o
r
s
T
e
x
t
b
o
o
k
s
/
T
r
a
d
e

B
o
o
k
s
1
.

D
o

y
o
u

u
s
e

D
C
F

t
e
c
h
n
i
q
u
e
s

t
o

e
v
a
l
u
a
t
e

i
n
v
e
s
t
m
e
n
t

o
p
p
o
r
t
u
n
i
t
i
e
s
?
9
5
%

Y
e
s
,

a
s

p
r
i
m
a
r
y

t
o
o
l
;

s
o
m
e

a
l
s
o

c
o
n
s
i
d
e
r

t
r
a
n
s
a
c
t
i
o
n
s

a
n
d

t
r
a
d
i
n
g

m
u
l
t
i
p
l
e
s
,

r
e
a
l

o
p
t
i
o
n
s
,

I
R
R

a
n
d

p
a
y
b
a
c
k

a
n
a
l
y
s
i
s
,

a
n
d

R
O
I

w
i
t
h
i
n

a

s
p
e
c
i
f
e
d

t
i
m
e

p
e
r
i
o
d

4
%

N
o
1
0
0
%

Y
e
s
1
0
0
%

Y
e
s
2
.

D
o

y
o
u

u
s
e

a
n
y

f
o
r
m

o
f

a

c
o
s
t

o
f

c
a
p
i
t
a
l

a
s

y
o
u
r

d
i
s
c
o
u
n
t

r
a
t
e

i
n

y
o
u
r

D
C
F

a
n
a
l
y
s
i
s
?
8
4
%

Y
e
s
1
1
%

N
o

5
%

D
e
c
l
i
n
e

t
o

a
n
s
w
e
r
1
0
0
%

Y
e
s
1
0
0
%

Y
e
s
3
.

F
o
r

y
o
u
r

c
o
s
t

o
f

c
a
p
i
t
a
l
,

d
o

y
o
u

f
o
r
m

a
n
y

c
o
m
b
i
n
a
t
i
o
n

o
f

c
a
p
i
t
a
l

c
o
s
t

t
o

d
e
t
e
r
m
i
n
e

a

W
A
C
C
?
9
5
%

Y
e
s

5
%

N
o

(
n
o
t

f
o
r

v
a
l
u
a
t
i
o
n
,

b
u
t

d
o
e
s

u
s
e

W
A
C
C

f
o
r

s
t
r
a
t
e
g
i
c

c
o
m
p
a
r
i
s
o
n
s
)
1
0
0
%

Y
e
s
1
0
0
%

Y
e
s
4
.

W
h
a
t

w
e
i
g
h
t
i
n
g

f
a
c
t
o
r
s

d
o

y
o
u

u
s
e
?

A
)

T
a
r
g
e
t

w
e
i
g
h
t
s

v
s
.

c
u
r
r
e
n
t

d
e
b
t
/
e
q
u
i
t
y
?

B
)

M
a
r
k
e
t

v
s
.

b
o
o
k

w
e
i
g
h
t
s
?
A
)

3
7
%

T
a
r
g
e
t
;

3
7
%

C
u
r
r
e
n
t
;

2
6
%

N
o
t

R
e
p
o
r
t
e
d
B
)

7
4

M
V

e
q
u
i
t
y

a
n
d

d
e
b
t
;

2
1

M
V

e
q
u
i
t
y

w
i
t
h

B
V

d
e
b
t
;

5

B
V

b
o
t
h
A
)

7
3
%

T
a
r
g
e
t
/
O
p
t
i
m
a
l
;

2
7
%

C
u
r
r
e
n
t
B
)

1
0
0

M
V

e
q
u
i
t
y

a
n
d

d
e
b
t
A
)

5
0
%

M
a
r
k
e
t
;

5
0
%

T
a
r
g
e
t
B
)

1
0
0

M
V

e
q
u
i
t
y

a
n
d

d
e
b
t
5
.

H
o
w

d
o

y
o
u

e
s
t
i
m
a
t
e

y
o
u
r

b
e
f
o
r
e

t
a
x

c
o
s
t

o
f

d
e
b
t
?
2
6
%

U
S

T
r
e
a
s
u
r
y

y
i
e
l
d

+

s
p
r
e
a
d
2
1
%

M
a
r
g
i
n
a
l
/
Y
T
M

o
u
t
s
t
a
n
d
i
n
g

d
e
b
t
2
1
%

W
e
i
g
h
t
e
d

a
v
g

o
u
t
s
t
a
n
d
i
n
g

i
s
s
u
e
s

5
%

B
a
n
k
e
r
s

e
s
t
i
m
a
t
e

5
%

C
u
r
r
e
n
t

y
i
e
l
d

5
%

C
u
r
r
e
n
t

r
a
t
e
,

b
a
n
k

d
e
b
t
1
1
%

O
t
h
e
r

5
%

N
/
A
5
5
%

C
u
r
r
e
n
t

y
i
e
l
d

t
o

m
a
t
u
r
i
t
y
4
5
%

N
e
w

d
e
b
t

y
i
e
l
d

t
o

m
a
t
u
r
i
t
y
8
3
%

Y
i
e
l
d

t
o

m
a
t
u
r
i
t
y
1
7
%

M
a
r
g
i
n
a
l

c
o
s
t

o
f

n
e
w

d
e
b
t
6
.

W
h
a
t

t
a
x

r
a
t
e

d
o

y
o
u

u
s
e
?
9
5
%

E
f
f
e
c
t
i
v
e

m
a
r
g
i
n
a
l

o
r

s
t
a
t
u
t
o
r
y

5
%

O
t
h
e
r
1
0
0
%

E
f
f
e
c
t
i
v
e

m
a
r
g
i
n
a
l

o
r

s
t
a
t
u
t
o
r
y
6
7
%

M
a
r
g
i
n
a
l

i
n
c
o
m
e

t
a
x

r
a
t
e
3
3
%

S
t
a
t
u
t
o
r
y

c
o
r
p
o
r
a
t
e

t
a
x

r
a
t
e
7
.

H
o
w

d
o

y
o
u

e
s
t
i
m
a
t
e

y
o
u
r

c
o
s
t

o
f

e
q
u
i
t
y
?

(
I
I

y
o
u

d
o

n
o
t

u
s
e

C
A
P
M
,

s
k
i
p

t
o

q
u
e
s
t
i
o
n

1
2
.
)
9
0
%

C
A
P
M

5
%

C
A
P
M

w
i
t
h

d
i
v
i
d
e
n
d

d
i
s
c
o
u
n
t

m
o
d
e
l

a
n
d

b
o
n
d
/
s
t
o
c
k

r
e
l
a
t
i
o
n
s
h
i
p

a
s

a

c
h
e
c
k

5

M
o
d
i
f
e
d

r
e
q
u
i
r
e
d

r
e
t
u
r
n

m
o
d
e
l

u
s
i
n
g

b
e
t
a
1
0
0
%

C
A
P
M
1
0
0
%

C
A
P
M
A
l
s
o

m
e
n
t
i
o
n

d
i
v
i
d
e
n
d

d
i
s
c
o
u
n
t
/
g
r
o
w
t
h
,

a
r
b
i
t
r
a
g
e

p
r
i
c
i
n
g
,

a
n
d

F
a
m
a
-
F
r
e
n
c
h

m
o
d
e
l
s
(
C
o
n
t
i
n
u
e
d
)
T
a
b
l
e

I
I
.

G
e
n
e
r
a
l

S
u
r
v
e
y

R
e
s
u
l
t
s

(
C
o
n
t
i
n
u
e
d
)
8
.

A
s

u
s
u
a
l
l
y

w
r
i
t
t
e
n
,

t
h
e

C
A
P
M

v
e
r
s
i
o
n

o
I

t
h
e

c
o
s
t

o
I

e
q
u
i
t
y

h
a
s

t
h
r
e
e

t
e
r
m
s
:

a

r
i
s
k

f
r
e
e

r
a
t
e
,

a

v
o
l
a
t
i
l
i
t
y

o
r

b
e
t
a

f
a
c
t
o
r
,

a
n
d

a

m
a
r
k
e
t

r
i
s
k

p
r
e
m
i
u
m
.

I
s

t
h
i
s

c
o
n
s
i
s
t
e
n
t

w
i
t
h

y
o
u
r

c
o
m
p
a
n
y
s

a
p
p
r
o
a
c
h
?
9
5
%

Y
e
s

5
%

N
o
1
0
0
%

Y
e
s
1
0
0
%

Y
e
s
9
.

W
h
a
t

d
o

y
o
u

u
s
e

f
o
r

t
h
e

r
i
s
k
-
f
r
e
e

r
a
t
e

(
b
o
t
h

m
a
t
u
r
i
t
y

a
n
d

m
e
a
s
u
r
e
m
e
n
t
)
?
5
2
%

1
0
-
y
e
a
r

T
r
e
a
s
u
r
i
e
s
2
1
%

2
0
-
y
e
a
r

T
r
e
a
s
u
r
i
e
s
2
1
%

3
0
-
y
e
a
r

T
r
e
a
s
u
r
i
e
s

5
%

N
/
A
2
1
%

u
s
e

s
o
m
e
t
h
i
n
g

o
t
h
e
r

t
h
a
n

t
h
e

s
p
o
t

y
i
e
l
d

t
o

m
a
t
u
r
i
t
y

(
e
.
g
.
,

s
o
m
e

f
o
r
m

o
f

h
i
s
t
o
r
i
c
a
l

a
v
e
r
a
g
i
n
g
)
7
3
%

1
0
-
y
e
a
r

T
r
e
a
s
u
r
i
e
s
1
8
%

2
0
-
y
e
a
r

T
r
e
a
s
u
r
i
e
s

9
%

3
0
-
y
e
a
r

T
r
e
a
s
u
r
i
e
s
3
6
%

u
s
e

s
o
m
e

h
i
s
t
o
r
i
c
a
l

a
v
e
r
a
g
e

r
a
t
h
e
r

t
h
a
n

t
h
e

s
p
o
t

y
i
e
l
d

t
o

m
a
t
u
r
i
t
y
5
0
%

L
o
n
g
-
t
e
r
m

T
r
e
a
s
u
r
i
e
s
3
3
%

L
o
n
g
-
t
e
r
m

T
r
e
a
s
u
r
i
e
s

l
e
s
s

h
i
s
t
o
r
i
c
a
l

t
e
r
m

p
r
e
m
i
u
m
1
7
%

M
a
t
c
h

t
e
n
o
r

o
f

T
r
e
a
s
u
r
y

t
o

t
h
a
t

o
f

i
n
v
e
s
t
m
e
n
t
1
0
.

W
h
a
t

d
o

y
o
u

u
s
e

a
s

y
o
u
r

v
o
l
a
t
i
l
i
t
y

o
r

b
e
t
a

f
a
c
t
o
r
?
5
3
%

E
x
p
l
i
c
i
t
l
y

r
e
f
e
r
e
n
c
e

B
l
o
o
m
b
e
r
g

b
e
t
a
s
2
6
%

U
s
e

a

p
u
b
l
i
s
h
e
d

s
o
u
r
c
e

(
o
t
h
e
r

t
h
a
n

B
l
o
o
m
b
e
r
g
)

o
r

a

t
h
i
r
d

p
a
r
t
y

a
d
v
i
s
o
r
s
;

t
h
r
e
e

o
f

t
h
e
s
e

m
e
n
t
i
o
n

B
a
r
r
a
3
7
%

M
e
n
t
i
o
n

s
e
l
f
-
c
a
l
c
u
l
a
t
e
d

b
e
t
a
s

b
u
t

s
o
m
e

m
a
y

u
s
e

B
l
o
o
m
b
e
r
g

f
o
r

t
h
i
s
2
6
%

M
e
n
t
i
o
n

c
o
m
p
a
r
i
s
o
n
s

a
c
r
o
s
s

s
o
u
r
c
e
s
(
3
2
%

o
f

r
e
s
p
o
n
d
e
n
t
s

m
e
n
t
i
o
n
e
d

(
u
n
s
o
l
i
c
i
t
e
d
)

u
n
l
e
v
e
r
i
n
g
/
r
e
l
e
v
e
r
i
n
g

b
e
t
a
)
7
3
%

F
u
n
d
a
m
e
n
t
a
l

b
e
t
a

f
r
o
m

B
a
r
r
a
4
4
%

B
e
t
a

f
r
o
m

B
l
o
o
m
b
e
r
g
1
8
%

S
e
l
f
-
c
a
l
c
u
l
a
t
e
d

h
i
s
t
o
r
i
c
a
l

b
e
t
a

o
r

o
t
h
e
r

p
u
b
l
i
s
h
e
d

s
o
u
r
c
e
(
2
7
%

o
f

r
e
s
p
o
n
d
e
n
t
s

m
e
n
t
i
o
n
e
d

(
u
n
s
o
l
i
c
i
t
e
d
)

u
n
l
e
v
e
r
i
n
g
/
r
e
l
e
v
e
r
i
n
g

b
e
t
a
)
1
0
0
%

M
e
n
t
i
o
n

p
u
b
l
i
s
h
e
d

s
o
u
r
c
e
s
(
O
n
e

r
e
c
o
m
m
e
n
d
s

l
e
v
e
r
i
n
g

i
n
d
u
s
t
r
y

b
e
t
a

t
o

c
o
m
p
a
n
y

t
a
r
g
e
t

c
a
p
i
t
a
l

s
t
r
u
c
t
u
r
e
)
Q
u
e
s
t
i
o
n
s
C
o
r
p
o
r
a
t
i
o
n
s
F
i
n
a
n
c
i
a
l

A
d
v
i
s
o
r
s
T
e
x
t
b
o
o
k
s
/
T
r
a
d
e

B
o
o
k
s
(
C
o
n
t
i
n
u
e
d
)
1
1
.

W
h
a
t

d
o

y
o
u

u
s
e

a
s

y
o
u
r

m
a
r
k
e
t

r
i
s
k

p
r
e
m
i
u
m
?
4
3
%

C
i
t
e

h
i
s
t
o
r
i
c
a
l

d
a
t
a

o
n
l
y

3
2
%

c
i
t
e

I
b
b
o
t
s
o
n

1
1
%

m
e
n
t
i
o
n

a
n
o
t
h
e
r

s
o
u
r
c
e
1
6
%

J
u
d
g
m
e
n
t

u
s
i
n
g

v
a
r
i
o
u
s

c
i
t
e
d

s
o
u
r
c
e
s
1
6
%

B
l
o
o
m
b
e
r
g
1
6
%

F
o
r
w
a
r
d
-
l
o
o
k
i
n
g

c
a
l
c
u
l
a
t
i
o
n

(
o
t
h
e
r

t
h
a
n

B
l
o
o
m
b
e
r
g
)

5
%

A
s
k

b
a
n
k

5

N
o

s
p
e
c
i
f
c

m
e
t
h
o
d
o
l
o
g
y

r
e
p
o
r
t
e
d
O
I

9

w
h
o

r
e
p
o
r
t
e
d

a

s
p
e
c
i
f
c

n
u
m
b
e
r
,

r
a
n
g
e

w
a
s

4
.
8
7
-
9
.
0
2
%
,

a
n
d

m
e
a
n

w
a
s

6
.
4
9
%
7
3
%

C
i
t
e

h
i
s
t
o
r
i
c
a
l

d
a
t
a
I
b
b
o
t
s
o
n

1
8
%

F
o
r
w
a
r
d
-
l
o
o
k
i
n
g

D
D
M

9

U
s
e

a

'
r
a
n
g
e
:

N
o

s
p
e
c
i
f
c

m
e
t
h
o
d
o
l
o
g
y

r
e
p
o
r
t
e
d
O
I

1
0

w
h
o

r
e
p
o
r
t
e
d

a

s
p
e
c
i
f
c

n
u
m
b
e
r
,

r
a
n
g
e

w
a
s

4
.
0
-
8
.
5
%
,

a
n
d

m
e
a
n

w
a
s

6
.
6
%
1
0
0
%

M
e
n
t
i
o
n

h
i
s
t
o
r
i
c
a
l

e
x
c
e
s
s

r
e
t
u
r
n
s
5
0
%

R
e
c
o
m
m
e
n
d

a
r
i
t
h
m
e
t
i
c

a
v
e
r
a
g
e
s
;

1
7
%

g
e
o
m
e
t
r
i
c

i
n

s
o
m
e

i
n
s
t
a
n
c
e
s
;

3
3
%

a
r
e

s
i
l
e
n
t

8
7
%

M
e
n
t
i
o
n

v
a
r
i
o
u
s

o
t
h
e
r

a
p
p
r
o
a
c
h
e
s
1
2
.

D
o

y
o
u

u
s
e

d
a
t
a

f
r
o
m

c
o
m
p
a
r
a
b
l
e

c
o
m
p
a
n
i
e
s

i
n

e
s
t
i
m
a
t
i
n
g

t
h
e

c
o
s
t

o
f

c
a
p
i
t
a
l
?

I
f

s
o
,

h
o
w

(
e
.
g
.
,

a
v
e
r
a
g
e
s

I
o
r

a

s
u
b
s
e
t

o
I

f
r
m
s

y
o
u

I
e
e
l

a
r
e

c
o
m
p
a
r
a
b
l
e
)
?
2
6
%

Y
e
s
,

i
n

o
r
d
e
r

t
o

g
e
t

b
e
t
a
s

t
o

r
e
l
e
v
e
r

o
r

t
o

s
e
l
e
c
t

a
p
p
r
o
p
r
i
a
t
e

r
i
s
k

c
l
a
s
s
3
2
%

N
o
4
2
%

I
n
d
i
r
e
c
t
l
y

a
s

a

c
h
e
c
k

o
r

r
e
f
e
r
e
n
c
e
8
2
%

U
s
e

c
o
m
p
s

n
o
r
m
a
l
l
y

a
s

b
e
n
c
h
m
a
r
k
1
8

U
s
e

c
o
m
p
s

o
n
l
y

i
I

f
r
m
`
s

W
A
C
C

l
o
o
k
s

u
n
r
e
l
i
a
b
l
e
6
7
%

R
e
c
o
m
m
e
n
d

e
s
t
i
m
a
t
i
n
g

a
n

i
n
d
u
s
t
r
y

a
s
s
e
t

b
e
t
a

a
n
d

r
e
l
e
v
e
r
i
n
g

t
o

t
h
e

t
a
r
g
e
t
s

c
a
p
i
t
a
l

s
t
r
u
c
t
u
r
e
1
3
.

H
a
v
i
n
g

e
s
t
i
m
a
t
e
d

y
o
u
r

c
o
m
p
a
n
y
s

c
o
s
t

o
f

c
a
p
i
t
a
l
,

d
o

y
o
u

m
a
k
e

a
n
y

f
u
r
t
h
e
r

a
d
j
u
s
t
m
e
n
t
s

t
o

r
e
f
e
c
t

t
h
e

r
i
s
k

o
I

i
n
d
i
v
i
d
u
a
l

i
n
v
e
s
t
m
e
n
t

o
p
p
o
r
t
u
n
i
t
i
e
s
?
5
3
%

Y
e
s
3
7
%

N
o

5
%

U
n
s
u
r
e

5
%

D
e
c
l
i
n
e

t
o

a
n
s
w
e
r
S
l
i
g
h
t
l
y

l
e
s
s

t
h
a
n

h
a
l
f

o
f

N
o
e
s

m
a
k
e

a
d
j
u
s
t
m
e
n
t
s

w
h
e
n

d
e
e
m
e
d

n
e
c
e
s
s
a
r
y

b
u
t

s
a
y

t
h
i
s

i
s

i
n
I
r
e
q
u
e
n
t
.
9
1
%

Y
e
s
/
A
s

a
p
p
r
o
p
r
i
a
t
e

9
%

N
o
3
3
%

D
i
s
c
u
s
s

f
u
r
t
h
e
r

a
d
j
u
s
t
m
e
n
t
s

f
o
r

s
m
a
l
l

c
a
p

a
n
d

i
n
d
u
s
t
r
y
3
3
%

A
d
j
u
s
t

f
o
r

p
r
o
j
e
c
t

r
i
s
k

a
n
d

d
i
v
i
s
i
o
n
3
3
%

I
g
n
o
r
e

t
h
e

i
s
s
u
e
1
4
.

H
o
w

I
r
e
q
u
e
n
t
l
y

d
o

y
o
u

r
e
-
e
s
t
i
m
a
t
e

y
o
u
r

c
o
m
p
a
n
y
s

c
o
s
t

o
f

c
a
p
i
t
a
l
?

5
%

M
o
n
t
h
l
y
2
1
%

Q
u
a
r
t
e
r
l
y
1
6
%

S
e
m
i
-
a
n
n
u
a
l
l
y
5
3
%

A
n
n
u
a
l
l
y

5
%

O
c
c
a
s
i
o
n
a
l
l
y
G
e
n
e
r
a
l
l
y
,

m
a
n
y

s
a
i
d

t
h
a
t

i
n

a
d
d
i
t
i
o
n

t
o

s
c
h
e
d
u
l
e
d

r
e
v
i
e
w
s
,

t
h
e
y

r
e
-
e
s
t
i
m
a
t
e

a
s

n
e
e
d
e
d

I
o
r

s
i
g
n
i
f
c
a
n
t

e
v
e
n
t
s

s
u
c
h

a
s

a
c
q
u
i
s
i
t
i
o
n
s

a
n
d

h
i
g
h
-
i
m
p
a
c
t

e
c
o
n
o
m
i
c

e
v
e
n
t
s
.
N
o
t

a
s
k
e
d
N
o
t

m
e
n
t
i
o
n
e
d
T
a
b
l
e

I
I
.

G
e
n
e
r
a
l

S
u
r
v
e
y

R
e
s
u
l
t
s

(
C
o
n
t
i
n
u
e
d
)
Q
u
e
s
t
i
o
n
s
C
o
r
p
o
r
a
t
i
o
n
s
F
i
n
a
n
c
i
a
l

A
d
v
i
s
o
r
s
T
e
x
t
b
o
o
k
s
/
T
r
a
d
e

B
o
o
k
s
(
C
o
n
t
i
n
u
e
d
)
T
a
b
l
e

I
I
.

G
e
n
e
r
a
l

S
u
r
v
e
y

R
e
s
u
l
t
s

(
C
o
n
t
i
n
u
e
d
)
Q
u
e
s
t
i
o
n
s
C
o
r
p
o
r
a
t
i
o
n
s
F
i
n
a
n
c
i
a
l

A
d
v
i
s
o
r
s
T
e
x
t
b
o
o
k
s
/
T
r
a
d
e

B
o
o
k
s
1
5
.

H
a
v
e

f
n
a
n
c
i
a
l

m
a
r
k
e
t

c
o
n
d
i
t
i
o
n
s

o
f

t
h
e

l
a
s
t

f
e
w

y
e
a
r
s

c
a
u
s
e
d

y
o
u

t
o

c
h
a
n
g
e

t
h
e

w
a
y

y
o
u

e
s
t
i
m
a
t
e

a
n
d

u
s
e

t
h
e

c
o
s
t

o
f

c
a
p
i
t
a
l
?
2
6
%

Y
e
s
6
3
%

N
o

5
%

U
n
s
u
r
e

5
%

N
o
t

i
n
t
e
r
n
a
l
l
y
,

b
u
t

a
d
v
i
s
i
n
g

I
B
s

h
a
v
e

m
a
d
e

a
d
j
u
s
t
m
e
n
t
s
2
7
%

Y
e
s
6
4
%

N
o

9
%

N
o

r
e
s
p
o
n
s
e
O
n
e

n
o
t
e
s

r
e
c
e
n
t

v
o
l
a
t
i
l
i
t
y

a
s

o
n
e

r
e
a
s
o
n

p
r
a
c
t
i
t
i
o
n
e
r
s

u
s
e

t
a
r
g
e
t

w
e
i
g
h
t
s

r
a
t
h
e
r

t
h
a
n

r
a
w

m
a
r
k
e
t

w
e
i
g
h
t
s

w
h
e
n

m
e
a
s
u
r
i
n
g

c
a
p
i
t
a
l

s
t
r
u
c
t
u
r
e
1
6
.

I
s

t
h
e

c
o
s
t

o
f

c
a
p
i
t
a
l

u
s
e
d

f
o
r

p
u
r
p
o
s
e
s

o
t
h
e
r

t
h
a
n

p
r
o
j
e
c
t

a
n
a
l
y
s
i
s

i
n

y
o
u
r

c
o
m
p
a
n
y
?

(
F
o
r

e
x
a
m
p
l
e
,

t
o

e
v
a
l
u
a
t
e

d
i
v
i
s
i
o
n
a
l

p
e
r
f
o
r
m
a
n
c
e
?
)
4
2
%

Y
e
s
4
7
%

N
o

5
%

I
n
d
i
r
e
c
t
l
y

5
%

D
e
c
l
i
n
e

t
o

a
n
s
w
e
r
N
o
t

a
s
k
e
d
6
7
%

D
i
s
c
u
s
s

i
n

c
o
n
t
e
x
t

o
f

p
e
r
f
o
r
m
a
n
c
e

m
e
a
s
u
r
e
m
e
n
t

a
n
d

E
V
A
3
3
%

A
r
e

s
i
l
e
n
t
1
7
.

D
o

y
o
u

d
i
s
t
i
n
g
u
i
s
h

b
e
t
w
e
e
n

s
t
r
a
t
e
g
i
c

a
n
d

o
p
e
r
a
t
i
o
n
a
l

i
n
v
e
s
t
m
e
n
t
s
?

I
s

c
o
s
t

o
f

c
a
p
i
t
a
l

u
s
e
d

d
i
f
f
e
r
e
n
t
l
y

i
n

t
h
e
s
e

t
w
o

c
a
t
e
g
o
r
i
e
s
?
6
8
%

Y
e
s
3
2
%

N
o
I
f

d
o

d
i
s
t
i
n
g
u
i
s
h
,

i
s

c
o
s
t

o
f

c
a
p
i
t
a
l

u
s
e
d

d
i
f
f
e
r
e
n
t
l
y

(
N
=
1
3
)
:
2
3
%

Y
e
s
;

3
9
%

N
o
;

3
0
%

M
a
y
b
e
;

5
%

N
/
A
N
o
t

a
s
k
e
d
N
o
t

m
e
n
t
i
o
n
e
d
1
8
.

W
h
a
t

m
e
t
h
o
d
s

d
o

y
o
u

u
s
e

t
o

e
s
t
i
m
a
t
e

t
e
r
m
i
n
a
l

v
a
l
u
e
?

D
o

y
o
u

u
s
e

t
h
e

s
a
m
e

d
i
s
c
o
u
n
t

r
a
t
e

f
o
r

t
h
e

t
e
r
m
i
n
a
l

v
a
l
u
e

a
s

I
o
r

t
h
e

i
n
t
e
r
i
m

c
a
s
h

f
o
w
s
?
N
o
t

a
s
k
e
d
1
0
0
%

B
o
t
h

m
u
l
t
i
p
l
e
s

a
n
d

p
e
r
p
e
t
u
a
l

g
r
o
w
t
h

D
C
F

m
o
d
e
l
5
5
%

H
a
v
e

n
o

p
r
e
f
e
r
e
n
c
e

b
e
t
w
e
e
n

m
o
d
e
l
s
2
7
%

P
r
e
f
e
r

p
e
r
p
e
t
u
i
t
y

m
o
d
e
l
1
8
%

P
r
e
f
e
r

m
u
l
t
i
p
l
e
s

a
p
p
r
o
a
c
h
9
1
%

U
s
e

s
a
m
e

W
A
C
C

f
o
r

T
V

9
%

D
i
d

n
o
t

s
p
e
c
i
f
y
A
l
l

r
e
c
o
m
m
e
n
d

D
C
F

e
q
u
a
t
i
o
n
s
.

5
0
%

r
e
c
o
m
m
e
n
d

a
l
s
o

u
s
i
n
g

m
u
l
t
i
p
l
e
s

a
n
d

t
r
i
a
n
g
u
l
a
t
i
n
g

o
n

v
a
l
u
e
.

T
h
e
r
e

i
s

n
o

d
i
s
c
u
s
s
i
o
n

o
f

d
i
f
f
e
r
i
n
g

d
i
s
c
o
u
n
t

r
a
t
e
s

f
o
r

t
e
r
m
i
n
a
l

v
a
l
u
e

a
n
d

i
n
t
e
r
i
m

c
a
s
h

f
o
w
s
.
1
9
.

I
n

v
a
l
u
i
n
g

a

m
u
l
t
i
d
i
v
i
s
i
o
n
a
l

c
o
m
p
a
n
y
,

d
o

y
o
u

a
g
g
r
e
g
a
t
e

t
h
e

v
a
l
u
e
s

o
f

t
h
e

i
n
d
i
v
i
d
u
a
l

d
i
v
i
s
i
o
n
s
,

o
r

j
u
s
t

v
a
l
u
e

t
h
e

f
r
m

a
s

a

w
h
o
l
e
?

I
I

y
o
u

v
a
l
u
e

e
a
c
h

d
i
v
i
s
i
o
n

s
e
p
a
r
a
t
e
l
y
,

d
o

y
o
u

u
s
e

a

d
i
f
f
e
r
e
n
t

c
o
s
t

o
f

c
a
p
i
t
a
l

f
o
r

e
a
c
h

o
n
e
?
N
o
t

a
s
k
e
d
1
0
0
%

U
s
u
a
l
l
y
T
y
p
i
c
a
l
l
y

v
a
l
u
e

t
h
e

e
n
t
e
r
p
r
i
s
e
1
0
0
%

V
a
l
u
e

t
h
e

p
a
r
t
s

i
f

s
i
z
e
,

r
i
s
k
,

o
r

o
t
h
e
r

f
a
c
t
o
r
s

m
e
r
i
t

t
h
e

c
o
n
s
i
d
e
r
a
t
i
o
n
9
1
%

U
s
e

s
e
p
a
r
a
t
e

W
A
C
C
s

9
%

D
i
d

n
o
t

s
p
e
c
i
f
y
A
l
l

r
e
c
o
m
m
e
n
d

v
a
r
y
i
n
g

t
h
e

d
i
s
c
o
u
n
t

r
a
t
e

t
o

r
e
f
e
c
t

t
h
e

r
i
s
k

o
I

t
h
e

c
a
s
h

f
o
w
s
.

O
n
l
y

o
n
e

(
1
7
)

d
i
s
c
u
s
s
e
s

v
a
l
u
a
t
i
o
n

b
y

p
a
r
t
s
.
(
C
o
n
t
i
n
u
e
d
)
T
a
b
l
e

I
I
.

G
e
n
e
r
a
l

S
u
r
v
e
y

R
e
s
u
l
t
s

(
C
o
n
t
i
n
u
e
d
)
Q
u
e
s
t
i
o
n
s
C
o
r
p
o
r
a
t
i
o
n
s
F
i
n
a
n
c
i
a
l

A
d
v
i
s
o
r
s
T
e
x
t
b
o
o
k
s
/
T
r
a
d
e

B
o
o
k
s
2
0
.

I
n

y
o
u
r

v
a
l
u
a
t
i
o
n
s

d
o

y
o
u

u
s
e

a
n
y

d
i
f
f
e
r
e
n
t

m
e
t
h
o
d
s

t
o

v
a
l
u
e

s
y
n
e
r
g
i
e
s

o
r

s
t
r
a
t
e
g
i
c

o
p
p
o
r
t
u
n
i
t
i
e
s

(
e
.
g
.
,

h
i
g
h
e
r

o
r

l
o
w
e
r

d
i
s
c
o
u
n
t

r
a
t
e
s
,

o
p
t
i
o
n
s

v
a
l
u
a
t
i
o
n
)
?
N
o
t

a
s
k
e
d
8
2

V
a
l
u
e

c
a
s
h

f
o
w
s

d
i
I
I
e
r
e
n
t
l
y

w
h
e
n

w
a
r
r
a
n
t
e
d
7
3
%

U
s
e

a

d
i
f
f
e
r
e
n
t

d
i
s
c
o
u
n
t

r
a
t
e

f
o
r

t
h
e

r
i
s
k

9
%

U
s
e

a

d
i
f
f
e
r
e
n
t

g
r
o
w
t
h

r
a
t
e
2
7
%

c
i
t
e
d

N
O
L
s

a
s

a
n

e
x
a
m
p
l
e
4
5
%

c
i
t
e
d

s
y
n
e
r
g
i
e
s

o
r

s
t
r
a
t
e
g
i
c

o
p
p
o
r
t
u
n
i
t
i
e
s

a
s

e
x
a
m
p
l
e
s
N
o
t

m
e
n
t
i
o
n
e
d
2
1
.

H
o
w

l
o
n
g

h
a
v
e

y
o
u

b
e
e
n

w
i
t
h

t
h
e

c
o
m
p
a
n
y
?

W
h
a
t

i
s

y
o
u
r

j
o
b

t
i
t
l
e
?
Y
e
a
r
s

w
i
t
h

f
r
m
:

R
a
n
g
e
:

2
-
3
2
;

M
e
a
n
:

1
5
.
2
Y
e
a
r
s

i
n

f
n
a
n
c
e
:

R
a
n
g
e
:

4
-
3
2
;

M
e
a
n
:

1
8
.
5
A
l
l

s
e
n
i
o
r
,

e
x
c
e
p
t

t
w
o
M
e
a
n
:

1
1
.
0

y
e
a
r
s

(
c
u
r
r
e
n
t

b
a
n
k
)
M
e
a
n
:

1
3
.
5

y
e
a
r
s

(
b
a
n
k
i
n
g

c
a
r
e
e
r
)
1

P
r
i
n
c
i
p
a
l
,

1

C
O
O
,

8

M
D
/
D
/
E
D
s
,

1

V
P
N
/
A
A. The Risk-free Rate of Return
As originally derived, the CAPM is a single period
model, so the question oI which interest rate best represents
the risk-free rate never arises. In a multi-period world
typically characterized by upward-sloping yield curves, the
practitioner must choose. The difference between realized
returns on short-term US Treasury-bills and long-term
T-bonds has averaged about 150 basis points over the long-
run; so choice of a risk-free rate can have a material effect on
the cost oI equity and WACC.
9
Treasury bill yields are more consistent with the CAPM
as originally derived and refect risk-Iree returns in the
sense that T-bill investors avoid material loss in value from
interest rate movements. However, long-term bond yields
more closely refect the deIault-Iree holding period returns
available on long-lived investments and thus more closely
mirror the types of investments made by companies.
Our survey results reveal a strong preference on the part of
practitioners for long-term bond yields. As shown in Table II
(Question 9), all the corporations and fnancial advisors use
Treasury bond yields for maturities of 10 years or greater,
with the 10-year rate being the most popular choice. Many
corporations said they matched the term of the risk-free
rate to the tenor of the investment. In contrast, a third of the
sample books suggested subtracting a term premium from
long-term rates to approximate a shorter term yield. Half of
the books recommended long-term rates but were not precise
on the choice of maturity.
Because the yield curve is ordinarily relatively fat
beyond ten years, the choice of which particular long-
term yield to use often is not a critical one. However, at the
time of our survey, Treasury markets did not display these
'normal conditions in the wake oI the fnancial crisis and
expansionary monetary policy. In the year we conducted our
survey (2012), the spread between 10- and 30-year Treasury
yields averaged 112 basis points.
10
While the text and trade
books do not directly address the question oI how to deal
with such markets, it is clear that some practitioners are
looking for ways to normalize what they see as unusual
circumstances in the government bond markets. For
9
This was estimated as the difference in arithmetic mean returns on long-
termgovernment bonds and US Treasury bills over the years 1900 to 2008,
using data fromE. Dimson and P. Marsh as cited in Brealey, Myers, and
Allen (2011) in Table 7.1 at page 158.

10
Over the period 1977-2012 the difference between the yields on 10- and
30-year Treasury bonds averaged 29 basis points. However, for the period
aIter the fnancial crisis this spread has been much higher in the midst oI
expansive Federal Reserve policy. For the period 2008-2012 the difference
averaged 103 basis points. During 2012 when we conducted our survey
it averaged 112 basis points. As we write in mid-J anuary 2013, the yields
on 10-, 20-, and 30-year Treasury bonds are 1.89%, 2.66%, and 3.06%
respectively. Calculations use Federal Reserve H-15 interest rate data.

instance, 21 oI the corporations and 36 oI the fnancial
advisors resort to some historical average of interest rates
rather than the spot rate in the markets. Such an averaging
practice is at odds with fnance theory in which investors see
the current market rate as the relevant opportunity. We return
to this issue later in the paper.
B. Beta Estimates
Finance theory calls for a forward-looking beta, one
refecting investors` uncertainty about the Iuture cash fows
to equity. Because Iorward-looking betas are unobservable,
practitioners are forced to rely on proxies of various kinds.
Often this involves using beta estimates derived from
historical data.
The usual methodology is to estimate beta as the slope
coeIfcient oI the market model oI returns:
R
it
=o
i
+
i
(R
mt
), (3)
where:
R
it
= return on stock I in time period (e.g., day, week,
month) t.
R
mt
= return on the market portfolio in period t.
u
i
= regression constant for stock i.
i
= beta for stock i.
In addition to relying on historical data, use of this
equation to estimate beta requires a number oI practical
compromises, each of which can materially affect the results.
For instance, increasing the number of time periods used in
the estimation may improve the statistical reliability of the
estimate but risks including stale, irrelevant information.
Similarly, shortening the observation period from monthly
to weekly, or even daily, increases the size of the sample but
may yield observations that are not normally distributed and
may introduce unwanted random noise. A third compromise
involves choice of the market index. Theory dictates that
R
m
is the return on the market portfolio, an unobservable
portfolio consisting of all risky assets, including human
capital and other non-traded assets, in proportion to their
importance in world wealth. Beta providers use a variety
of stock market indices as proxies for the market portfolio
on the argument that stock markets trade claims on a
suIfciently wide array oI assets to be adequate surrogates
for the unobservable market portfolio.
Another approach is to predict beta based on underlying
characteristics of a company. According to Barra, the
predicted beta, the beta Barra derives from its risk model,
is a forecast of a stocks sensitivity to the market. It is also
known as fundamental beta because it is derived from
fundamental risk factors. such as size, yield, and volatility
plus industry exposure. Because we re-estimate these
Table III. Compromises Underlying Beta Estimates and Their Effect on Estimated Betas of
Sample Companies
*With the Bloomberg service it is possible to estimate a beta over many differing time periods, market indices, and smoothed or unadjusted.
The fgures presented here represent the baseline or deIault-estimation approach used iI one does not speciIy other approaches. Value Line
states that 'the Beta coeIfcient is derived Irom a regression analysis oI the relationship between weekly percentage changes in the price oI
a stock and weekly percentage changes in the NYSE Index over a period oI fve years. In the case oI shorter price histories, a smaller time
period is used, but two years is the minimum. The betas are adjusted for their long-term tendency to converge toward 1.00.
Bloomberg* Value Line* Barra
Number of observations
Time interval
Market index proxy
Sample mean beta
Sample median beta
102
weekly over 2 yrs.
S&P 500
0.96
0.98
260
weekly over 5 yrs.
NYSE composite
0.93
0.90
statistical models using
company characteristics

0.91
0.96
Table IV. Betas for Corporate Survey Respondents
Value Line betas are as of J anuary 11, 2013.
Bloomberg betas are as of J an 22, 2013. The adjusted beta is calculated as 2/3 times the raw beta plus 1/3 times 1.0.
Barra betas are Irom January 2013. Source: Barra. The Barra data contained herein are the property oI Barra, Inc. Barra, its aIfliates and
information providers make no warranties with respect to any such data. The Barra data contained herein is used under license and may
not be further used, distributed or disseminated without the express written consent of Barra.
Bloomberg Betas Value Line Barra Range
2-year raw 5-year raw 2-year
adjusted
5-year
adjusted
Beta Beta Max-Min
AmerisourceBergen 0.60 0.61 0.74 0.74 0.70 0.64 0.14
Caterpillar 1.48 1.45 1.32 1.30 1.35 1.47 0.18
Chevron 1.11 1.01 1.07 1.01 0.95 0.99 0.16
Coca-Cola 0.58 0.55 0.72 0.70 0.60 0.53 0.19
Costco Wholesale 0.64 0.73 0.76 0.82 0.75 0.64 0.18
IBM 0.85 0.83 0.90 0.89 0.85 0.73 0.17
International Paper 1.37 1.57 1.25 1.38 1.40 1.37 0.32
Intuit 0.92 0.71 0.95 0.80 0.90 0.77 0.24
J ohnson Controls 1.56 1.41 1.38 1.28 1.30 1.40 0.29
PepsiCo 0.34 0.46 0.56 0.64 0.60 0.54 0.30
Qualcomm 1.10 0.85 1.07 0.90 0.85 1.10 0.26
Sysco 0.62 0.79 0.75 0.86 0.70 0.60 0.26
Target 0.54 1.07 0.69 1.04 0.90 0.82 0.53
Texas Instruments 1.13 0.92 1.09 0.95 0.90 0.97 0.23
Union Pacifc 1.14 1.08 1.09 1.05 1.15 0.96 0.19
United Technologies 1.17 0.99 1.12 0.99 1.00 0.96 0.21
UPS 0.85 0.92 0.90 0.95 0.85 0.84 0.11
W.W. Grainger 0.98 0.91 0.98 0.94 0.95 1.05 0.14
Walt Disney 1.20 1.10 1.13 1.06 1.00 0.96 0.24
Mean 0.96 0.94 0.97 0.96 0.93 0.91 0.23
Median 0.98 0.92 0.98 0.95 0.90 0.96 0.21
Standard Deviation 0.34 0.30 0.23 0.20 0.23 0.28 0.09
risk Iactors daily, the predicted beta refects changes in the
companys underlying risk structure in a timely manner.
11

Table III shows the compromises underlying the beta
estimates of three prominent providers (Bloomberg, Value
Line and Barra) and their combined effect on the beta
estimates of our sample companies. The mean beta of our
sample companies is similar from all providers, 0.96 from
Bloomberg, 0.93 according to Value Line, and 0.91 from
Barra. On the other hand, the averages mask differences for
individual companies. Table IV provides a complete list of
sample betas by provider.
Over half of the corporations in our sample (Table II,
Question 10) cite Bloomberg as the source for their beta
estimates, and some of the 37% that say they calculate
their own may use Bloomberg data and programs. 26% of
the companies cite some other published source and 26%
explicitly compare a number of beta sources before making
a fnal choice. Among fnancial advisors, there is strong
reliance on fundamental betas with 89% of the advisors
using Barra as a source. Many advisors (44%) also use
Bloomberg. About a third oI both companies and fnancial
advisors mentioned levering and unlevering betas even
though we did not ask them for this information. And in
response to a question about using data Irom other frms
(Table II, Question 12), the majority of companies and all
advisors take advantage of data on comparable companies to
inform their estimates of beta and capital costs.
12

Within these broad categories, the comments in Table
V indicate that a number of survey participants use more
pragmatic approaches which combine published beta
estimates or adjust published estimates in various heuristic
ways.
11
Barra (2007) on page 18. The actual quote Irom 2007 mentions monthly
updating. In obtaining Barra data, we learned that updates are now daily
so have substituted that in the quotes since we did not fnd an updated
reference.

12
Conroy and Harris (2011) compare the impacts of various approaches to
using comparable company data to estimate the cost oI capital Ior frms in
the S&P 500.
Table V. Choice of Beta
We asked our sample companies and advisors "what do you use as your beta estimate?" A sampling of responses shows the choice is not
always a simple one.
'We use Bloomberg`s deIault calculation. We take special care to support beta chosen iI doing an acquisition or major investment.
We use Bloomberg (both historical and historical adjusted) plus Barra and calibrate based on comparing the results.
We use our beta and check against those of competitors. We unlever the peers and then relever to our capital structure. The results come
pretty close to our own beta, so that's confrming.
We use the median beta of comparable companies, based on analysis of size and business. We have a third party identify comparable
companies and betas.
We use Barra and Bloomberg and triangulate based on those numbers. The problem comes up for getting a pure play for a division or a
company that hasnt been public for a long time. We then have to pick comparable companies.
"Each line oI business has its own peer group oI companies and cost oI capital. Using fve-year betas Irom Bloomberg, we fnd an average
unlevered beta for the peer group and then relever to our corporate-wide capital structure.
C. Equity Market Risk Premium
This topic prompted the greatest variety of responses
among survey participants. Finance theory says the equity
market risk premium should equal the excess return
expected by investors on the market portfolio relative to
riskless assets. How one measures expected future returns
on the market portfolio and on riskless assets is a problem
left to practitioners. Because expected future returns are
unobservable, past surveys of practice have routinely
revealed a wide array of choices for the market risk premium.
For instance, Fernandez, Aguirreamalloa, and Corres (2011)
survey professors, analysts and companies on what they
use as a US market risk premium. Of those who reported a
reference to justify their choice, the single most mentioned
source was Ibbotson/Morningstar, but even among those
citing this reference, there was a wide dispersion of market
risk premium estimates used. Carleton and Lakonishok
(1985) demonstrate empirically some of the problems with
such historical premiums when they are disaggregated for
diIIerent time periods or groups oI frms. Dimson, Marsh,
and Staunton (2011a, 2011b) discuss evidence from an array
of markets around the globe.
How do our best practice companies cope? Among
fnancial advisors, 73 extrapolate historical returns into
the future on the presumption that past experience heavily
conditions future expectations. Among companies, 43%
cite historical data and another 16% use various sources
inclusive of historical data. Unlike the results of our earlier
study (1998) in which historical returns were used by all
companies and advisors, we found a number of respondents
(18 oI fnancial advisors and 32 oI companies) using
forward-looking estimates of the market risk premium. The
advisors cited versions of the dividend discount model. The
companies used a variety of methods including Bloombergs
version of the dividend discount model.
13

13
In our conversations, company respondents sometimes noted they used
the Bloomberg estimate of the market risk premiumbut did not have
detailed knowledge of the calculation. As described by Bloomberg, their
Even when historical returns are used to estimate the
market risk premium, a host of differences emerge including
what data to use and what method to use for averaging. For
instance, a leading textbook cites US historical data back
to 1900 from Dimson and Staunton (as cited by Brealey,
Myers, and Allen (2011), p.158) while 73 oI our fnancial
advisors cite Ibbotson data which traces US history back to
1926. Among companies, only 32% explicitly cite Ibbotson
as their main reference for data and 11% cite other historical
sources.
14
Even using the same data, another chief difference was
in their use of arithmetic versus geometric averages. The
arithmetic mean return is the simple average of past returns.
Assuming the distribution of returns is stable over time and
that periodic returns are independent of one another, the
arithmetic return is the best estimator of expected return. The
geometric mean return is the internal rate of return between a
single outlay and one or more future receipts. It measures the
compound rate of return investors earned over past periods.
It accurately portrays historical investment experience.
Unless returns are the same each time period, the geometric
average will always be less than the arithmetic average and
the gap widens as returns become more volatile.
15
Based on Ibbotson data (2012) from 1926 to 2011, Table
VI illustrates the possible range oI equity market risk
premiums depending on use of the geometric as opposed
to the arithmetic mean equity return and on use oI realized
returns on T-bills as opposed to T-bonds. Even wider
variations in market risk premiums can arise when one
changes the historical period for averaging or decides to use
estimates of country risk premiums are based on projections of future
dividends in a multistage dividend discount model. At the time of our
survey, the US country risk premiumfromBloomberg was in the range
of 8-9%, well above averages from historical returns. See Harris and
Marston (2001, 2013) for discussion of changing risk premiums over time.

14
With only minor exceptions, our respondents used US data rather than
rely on global indices for both their estimates of beta and the market
risk premium. Dimson, Marsh, and Staunton (2011a) discuss historical
estimates of the market risk premiumusing data frommany countries.

15
See Brealey, Myers, and Allen (2011), pages 158-159 for the argument
to support use of an arithmetic mean. For large samples of returns, the
geometric average can be approximated as the arithmetic average minus
one halI the variance oI realized returns.
Table VI. Historical Averages to Estimate the Equity Market Risk Premium, (R
m
- R
f
)
Figures are the annual average risk premium calculated over the period 1926-2011 based on data drawn from Table II-I, Ibbotson (2012),
where the Rm was drawn Irom the 'Large Company Stocks series, and RI drawn Irom the 'Long-Term Government Bonds and 'US
Treasury Bills series.
Arithmetic Mean
Geometric Mean
Relative to
T-Bill Returns
8.2%
6.0%
Relative to
T-Bond Returns
5.7%
3.9%
data from outside the US For instance, Dimson, Marsh, and
Staunton (2011a) provide estimates oI historical equity risk
premiums for a number of different countries since 1900.
Since our respondents all used longer-term Treasuries as
their risk-free rate, the right-most column of Table VI most
closely fts that choice. Even when respondents explicitly
referenced the arithmetic or geometric mean of historical
returns, many rounded the fgure or used other data to adjust
their fnal choice. The net result is a wide array oI choices
for the market risk premium. For respondents who provided
a numerical fgure (Table II, Question 11), the average Ior
companies was 6.49%, very close to the average of 6.6%
Irom fnancial advisors. These averages mask considerable
variation in both groups. We had responses as low as 4%
and as high as 9%. The 4% value is in line with the Ibbotson
(2012) historical fgures using the geometric mean spread
between stocks and long-term government bonds. The upper
end of 9 percent comes from forward-looking estimates
done in 2012 when US fnancial markets refected a very low
interest rate environment.
16
We add a word of caution in how
to interpret some of the differences we found in the market
risk premium since the ultimate cost of capital calculation
depends on the joint choice of a risk premium, the risk-free
rate and beta. We return to this issue when we illustrate
potential differences in the cost of capital.
As shown in Table VII, comments in our interviews
exemplify the diversity among survey participants. This
variety of practice displays the challenge of application
since theory calls for a forward-looking risk premium, one
that refects current market sentiment and may change with
market conditions. What is clear is that there is substantial
variation as practitioners try to operationalize the theoretical
call for a market risk premium. And, as is clear in some
of the respondent comments, volatility in markets has
made the challenge even harder. Compared to our earlier
study (1998) in which respondents almost always applied
historical averages, current practice shows a wider variation
in approach and considerable judgment. This situation
points the way for valuable future research on the market
risk premium.
16
Harris and Marston (2001, 2013) discuss evidence that the market risk
premium is inversely related to interest rates.
Table VII. Choice of the Market Risk Premium
"What do you use as your market risk premium?" A sampling of responses from our best practice companies shows the choice can be a
complicated one.
'We take an average oI arithmetic mean and geometric mean Ior equity risk premium.
'5.5 - 6.5. Refects a judgmental synthesis oI various academic views and fnancial market perspectives.
Estimate a forward-looking risk premium. Use a methodology that incorporates S&P P/E ratio. It is a more volatile metric than using a
historical risk premium. Use historicals as a sanity check.
6.5-7%. We ask several banks how we compare to comparable companies, including comparable size and industry.
Use the long-term (1926-2011) Ibbotson's S&P 500 premium over the risk-free rate.
Comments Irom fnancial advisors also were revealing. While some simply responded that they use a published historical average, others
presented a more complex picture.
"We used to apply the geometric mean, and then we switched to arithmetic. Now we use 4.6 - 6.6%, so we'll show for both ends of that
distribution. Based mainly on Ibbotson, but may add to that for emerging market companies.
Forward-looking estimate using dividend discount modelbank's proprietary model, which is forward-looking and uses S&P price
level, plus projections and payout to get an implied cost oI equity
IV. The Impact of Various Assumptions for
Using CAPM
To illustrate the effect of these various practices on
estimated capital costs, we mechanically selected the two
sample companies with the largest and smallest range of
beta estimates in Table IV. We estimated the hypothetical
cost oI equity and WACC Ior Target Corporation, which
has the widest range in estimated betas, and for UPS which
has the smallest range. Our estimates are hypothetical in
that we do not adopt any information supplied to us by the
companies and fnancial advisors but rather apply a range
of approaches based on publicly available information as
of early 2013. Table VIII gives Targets estimated costs of
equity and WACCs under various combinations oI risk-
free rate, beta, and market risk premiums. Three clusters
of possible practice are illustrated, each in turn using betas
as provided by Bloomberg, Value Line, and Barra. The frst
approach, adopted by a number of our respondents, uses a
10-year T-bond yield and a risk premium of 6.5% (roughly
the average response Irom both companies and fnancial
advisors). The second approach also uses a 6.5% risk
premium but moves to a 30-year rate to proxy the long-term
interest rate. The third method uses the ten-year Treasury
rate but a risk premium of 9%, consistent with what some
adopters of a forward-looking risk premium applied. We
repeated these general procedures for UPS
The resulting ranges of estimated WACCs for the two
frms are as Iollows:
The range from minimum to maximum is considerable for
both frms, and the economic impact potentially stunning. To
illustrate this, the present value of a level perpetual annual
stream of $10 million would range between $117 million
and $218 million for Target, and between $109 million and
$151 million for UPS.
Given the positive yield curve in early 2013, the variations
in our illustration are explained by choices for all three
elements in applying the CAPM: the risk-free rate, beta, and
the equity market premium assumption. Moreover, we note
that use of a 10-year Treasury rate in these circumstances
leads to quite low cost oI capital estimates iI one sticks to
traditional risk premium estimates often found in textbooks
which are in the range of 6%. From talking to our respondents,
we sense that many are struggling with how to deal with
current market conditions that do not ft typical historical
norms, a topic we discuss in more detail in Section VI.
V. Risk Adjustments to WACC
Finance theory is clear that the discount rate should rise
and Iall in concert with an investment`s risk and that a frm`s
WACC is an appropriate discount rate only for average-risk
investments by the frm. High-risk, new ventures should
face higher discount rates, while replacement and repair
investments should face lower ones. Attracting capital
requires that prospective return increase with risk. Most
practitioners accept this reasoning but face two problems
when applying it. First, it is often not clear precisely how much
a given investments risk differs from average, and second,
even when this amount is known, it is still not obvious how
large an increment should be added to, or subtracted from,
the frm`s WACC to determine the appropriate discount rate.
We probed the extent to which respondents alter
discount rates to refect risk diIIerences in questions about
variations in project risk, strategic investments, terminal
values, multidivisional companies, and synergies (Table II,
Questions 13 and 17-20). Responses indicate that the great
preponderance oI fnancial advisors and text authors strongly
Maximum
WACC
Minimum
WACC
Difference in
Basis Points
Target 8.58% 4.58% 400
UPS 9.17% 6.62% 255
Table VIII. Variations in Cost of Capital (WACC) Estimates for Target Corporation
Using Different Methods of Implementing the Capital Asset Pricing Model
Data are as oI January 22, 2013. The CAPM is used to estimate the cost oI equity. Interest rates are Irom Bloomberg and the Federal
Reserve. The cost of debt is assumed to be 4.21% (average of Aaa and Baa yields). We approximated the capital structure and tax rate
using the market value oI equity and the most recent fnancial statements, yielding debt as 32 oI capital and a 34 tax rate.
1. Ten-year Treasury rate plus risk premium of 6.5%
(Most common choice of proxy for risk-free rate and average risk premium used by respondents)
R
f
=1.92%, yield to maturity on 10-year US Treasury bond
R
m
-R
f
=6.50%, average value for respondents
Cost of Equity Cost of Capital
Beta Service K
e
WACC
Bloomberg (deIault), .54 5.42 4.58
Bloomberg (5-year, adj.), 1.04 8.67 6.81
Value Line, .90 7.76 6.18
Barra, .82 7.24 5.83
2. Thirty-year Treasury rate plus risk premium of 6.5%
(Longer-term maturity choice favored by some analysts)
R
f
R
m
-R
f
=6.5%%, average value for respondents
Beta Service K
e
WACC
Bloomberg (fve year, adj.), 1.04 9.79 7.57
Value Line, .90 8.88 6.94
Barra, .82 8.36 6.59
3. Ten-year Treasury rate plus risk premium of 9.0%
(Consistent with some applications of a forward-looking risk premium estimate)
R
f
R
m
-R
f
=9.0%, upper-end of risk premium estimates
Beta Service K
e
WACC
Bloomberg (fve year, adj.), 1.04 11.27 8.58
Value Line, .90 10.01 7.72
Barra, .82 9.29 7.23
favor varying the discount rate to capture differences in risk
(Table II, Questions 13, 19, and 20). Corporations, on the
other hand, are more evenly split, with a sizeable minority
electing not to adjust discount rates for risk differences
among individual projects (Table II, Questions 13 and 17).
Comparing these results with our earlier study, it is worth
noting that while only about half of corporate respondents
adjust discount rates Ior risk, this fgure is more than
double the percentage reported in 1998. Despite continuing
hesitance, companies are apparently becoming more
comfortable with explicit risk adjustments to discount rates.
A closer look at specifc responses suggests that
respondents enthusiasm for risk-adjusting discount rates
depends on the quality oI the data available. Text authors
live in a largely data-Iree world and thus have no qualms
recommending risk adjustments whenever appropriate.
Financial advisors are a bit more constrained. They regularly
confront real-world data, but their mission is often to value
companies or divisions where extensive market information
is available about rates and prices. Correspondingly, virtually
all advisors questioned value multi-division businesses by
parts when the divisions differed materially in size and risk,
and over 90% are prepared to use separate division WACCs
to refect risk diIIerences. Similarly, 82 oI advisors value
merger synergies and strategic opportunities separately from
operating cash fows, and 73 are prepared to use diIIerent
discount rates when necessary on the various cash fows.
There is a long history of empirical research on how
shareholder returns vary across frm size, leading some
academics to suggest that a small cap premium should
be added to the calculated cost oI capital Ior such frms.
17

Our study focuses on large public companies, so it is not
17
Banz (1981) and Renganum (1981) frst identifed that frms with smaller
market capitalization had earned higher average returns than stocks
generally and higher than those predicted even if one adjusts for risk using
the CAPM. Fama and French (1992) identify size as a critical factor in
explaining diIIerences in returns. Pratt and Grabowski (2010) discuss size
adjustments and the use of Ibbotson data on size groupings.
surprising that frm responses do not reveal any such small
cap adjustments. In contrast, fnancial advisors work with a
wide spectrum of companies and are thus more likely to be
sensitive to the issueas indeed they are. Among fnancial
advisors interviewed, 91% said they would at times increase
the discount rate when evaluating small companies. Of
those who did make size adjustments, half mentioned using
Ibbotson (2012) data which show differences in past returns
among frms oI diIIerent size. The adjustment process varied
among advisors, as the Iollowing illustrative quotes suggest.
Adjustments are discretionary, but we tend to adjust for
extreme size. We have used a small cap premium, but
we dont have a set policy to make adjustments. It is fairly
subjective. We apply a small cap premium only for micro-
cap companies. We use a small cap premium for $300
million and below.
In important ways corporate executives face a more
complex task than fnancial advisors or academics.
They must routinely evaluate investments in internal
opportunities, and new products and technologies, for which
objective, third party information is nonexistent. Moreover,
they work in an administrative setting where decision rights
are widely dispersed, with headquarters defning procedures
and estimating discount rates, and various operating people
throughout the company analyzing different aspects of a
given project. As Table IX reveals, these complexities lead
to a variety of creative approaches to dealing with risk.
A number of respondents describe making discount rate
adjustments to distinguish among divisional capital costs,
international as opposed to domestic investments, and
leased versus purchased assets. In other instances, however,
respondents indicated they hold the discount rate constant
and deal with risk in more qualitative ways, sometimes by
altering the project cash fows being discounted.
Why do corporations risk-adjust discount rates in some
settings and use different, often more ad hoc, approaches in
others? Our interpretation is that risk-adjusted discount rates
are more likely to be used when the analyst can establish
relatively objective fnancial market benchmarks Ior what
the risk adjustment should be. At the division level, data
Table IX. Adjusting Discount Rates for Risk
When asked whether they adjusted discount rates for project risk, companies provided a wide range of responses.
Yes, but [the process] is fairly ad hoc. Theres not a formal number.
We dont risk adjust, [but] we make sure were on target by using sensitivity analysis and checking key assumptions.
For new deals, we add 20% to the cost of capital.
Yes, we make adjustments for different countries.
We make subjective adjustments [to our discount rate] for new technologies or products or customers, all of which carry more uncertainty.
We use a hurdle rate that is intentionally higher than our WACC. Recent WACC has been 9.64% and the hurdle rate is 15%, and then we
add qualitative considerations Ior the fnal decision.
'Generally no Iurther adjustments are made unless specifcs are identifed at the project level that would be very diIIerent risk. For
instance, a contractual cash fow might be treated as a debt equivalent cash fow and given a lower discount rate.
on comparable companies inform division cost of capital
estimates. Debt markets provide surrogates for the risks
in leasing cash fows, and international fnancial markets
shed light on cross-country risk differences. When no such
benchmarks exist, practitioners look to other more informal
methods for dealing with risk. In our view, then, practical
use of risk-adjusted discount rates occurs when the analyst
can fnd reliable market data indicating how comparable-
risk cash fows are being valued by others.
The same pragmatic perspective was evident when we
asked companies how Irequently they re-estimated their
capital costs (Table II, Question 14). Even among frms
that re-estimate costs Irequently, there was reluctance to
alter the underlying methodology employed or to revise
the way they use the number in decision making. Firms
also appear sensitive to administrative costs, evidencing
reluctance to make small adjustments but prepared to revisit
the numbers at any time in anticipation of major decisions
or in response to fnancial market upheavals. Benchmark
companies recognize a certain ambiguity in any cost number
and are willing to live with approximations. While the bond
market reacts to minute basis point changes in interest rates,
investments in real assets involve much less precision,
due largely to greater uncertainty, decentralized decision-
making, and time consuming decision processes. As noted in
Table X, one respondent evidences an extreme tolerance for
rough estimates in saying that the frm re-estimates capital
costs every quarter, but has used 10 Ior a long time because
it seems to have been successful so far. Our interpretation
is that the mixed responses to questions about risk adjusting
and re-estimating discount rates refect an oIten sophisticated
set of practical considerations. Chief among them are the
size of the risk differences among investments, the volume
and quality oI inIormation available Irom fnancial markets,
and the realities of administrative costs and processes.
When conditions warrant, practitioners routinely employ
risk adjustments in project appraisal. Acquisitions, valuing
divisions and cross-border investments, and leasing
decisions were Irequently cited examples. In contrast, when
conditions are not favorable, practitioners are more likely
Table X. Re-estimating the Cost of Capital
'How Irequently do you re-estimate your company`s cost oI capital? Here are responses Irom best practice companies.
[We re-estimate] annually unless a fundamental event that is a game changer occurs, such as the banking crisis in 2008.
[We re-estimate] once a year around May since this is right before impairment testing.
'We re-estimate twice a year and Ior special events such as a major acquisition.
We calculate the hurdle rate each year. We try to avoid any changes less than plus or minus 25 basis points.
'Formally, we re-estimate our cost oI capital every quarter, but generally we have used 10 Ior a long time, which seems to have been
successful so far.
Table XI. Judgments Related to Financial Market Conditions
Some of our best practice companies and advisors noted that their choice of a risk-free rate attempted to remove any unusual conditions
they saw in current market yields. We asked "What do you use for a risk-free rate?" and heard the following:
"20-year US government bonds. II it seems to be unusually high or low, we may use a trailing average or other modifed number.
'Use a fve-year rolling average in order to smooth out volatility associated with current/recent market trends.
Historically had used the spot rate yield to maturity on 10-year government bonds, but more recently have changed to thinking about
factors driving government interest rates, so we have moved away from the spot rate and toward the average yield over last 10 years.
to rely on cruder capital cost estimates and cope with risk
differences by other means.
VI. Recent Institutional and Market
Developments
As discussed in the prior section, our interviews reveal
that the practice of cost of capital estimation is shaped
by forces that go beyond considerations found in usual
academic treatments of the topic. A feature that was more
pronounced than in our prior study is the infuence oI a wide
array of stakeholders. For instance, a number of companies
voiced that any change in estimation methods would raise
red fags with auditors looking Ior process consistency in
key items such as impairment estimates. Some advisors
mentioned similar concerns, citing their work in venues
where consistency and precedent were major considerations
(e.g. fairness opinions, legal settings). Moreover, some
companies noted that they outsourced substantial parts of
their estimation to advisors or data providers. These items
serve as a reminder that the art of cost of capital estimation
and its use are part of a larger process of managementnot
simply an application oI fnance theory.
The fnancial upheaval in 2008-2009 provided a natural
test of respondents commitment to existing cost of
capital estimation methodologies and applications. When
confronted with a major external shock, did companies make
wholesale changes or did they keep to existing practices?
When we asked companies and advisors iI fnancial market
conditions in 2008-2009 caused them to change the way they
estimate and use the cost of capital (Table II, Question 15),
over three-fIths replied 'No. In the main, then, there was
not a wholesale change in methods. That said, a number of
respondents noted discomfort with cost of capital estimation
in recent years. Some singled out high volatility in markets.
Others pointed to the low interest rate environment
resulting from Federal Reserve policies to stimulate the US
economy. Combining low interest rates and typical historical
risk premiums created capital cost estimates that some
practitioners viewed as too low. One company was so
distrustful of market signals that it placed an arbitrary eight
percent foor under any cost oI capital estimate, noting that
since 2008, as rates have decreased so drastically, we dont
feel that [the estimate] represents a long-term cost of capital.
Now we dont report anything below 8% as a minimum [cost
of capital].
Among the minority who did revise their estimation
procedures to cope with these market forces, one change was
to put more reliance on historical numbers when estimating
interest rates as indicated in Table XI. This is in sharp contrast
to both fnance theory and what we Iound in our prior study.
Such rejection of spot rates in favor of historical averages
or arbitrary numbers is inconsistent with the academic view
that historical data do not accurately refect current attitudes
in competitive markets. The academic challenge today is to
better articulate the extent to which the superiority of spot
rates still applies when markets are highly volatile and when
governments are aggressively attempting to lower rates
through such initiatives as quantitative easing.
Another change in estimation methods since our earlier
study is refected in the Iact that more companies are using
forward-looking risk premiums as we reported earlier and
illustrated in Table VII. Since the forward-looking premiums
cited by our respondents were higher than historical risk
premiums, they mitigated or offset to some degree the
impact of low interest rates on estimated capital costs.
18

18
Pratt and Grabowski

(2010) provide a discussion of estimating forward
looking risk premiums. Harris and Marston (2001, 2013) discuss evidence
that the market risk premiumis inversely related to interest rates.
VII. Conclusions
Our research sought to identify the best practice in
cost of capital estimation through interviews with leading
corporations and fnancial advisors. Given the huge annual
expenditure on capital projects and corporate acquisitions
each year, the wise selection of discount rates is of material
importance to senior corporate managers.
Consistent with our 1998 study of the same topic, this
survey reveals broad acceptance of the WACC as the basis
for setting discount rates. In addition, the survey reveals
general alignment between the advice of popular textbooks
and the practices of leading companies and corporate
advisors in many aspects of the estimation of WACC. The
main continuing area of notable disagreement is in the
details of implementing the CAPM to estimate the cost of
equity. This paper outlines the varieties oI practice in CAPM
use, the arguments in favor of different approaches, and the
practical implications of differing choices.
In summary, we believe that the following elements
represent best current practice in the estimation of WACC:
Weights should be based on market-value mixes of debt
and equity.
The after-tax cost of debt should be estimated from mar-
ginal pretax costs, combined with marginal tax rates.
CAPM is currently the preferred model for estimating
the cost oI equity.
Betas are drawn substantially from published sources.
Where a number of statistical publishers disagree, best
practice often involves judgment to estimate a beta.
Moreover, practitioners often look to data on comparable
companies to help benchmark an appropriate beta.
Risk-Iree rate should match the tenor oI the cash fows
being valued. For most capital projects and corporate
acquisitions, the yield on the US government Treasury
bond of ten or more years in maturity would be appropri-
ate.
Choice oI an equity market risk premium is the subject oI
considerable controversy both as to its value and method
of estimation. While the market risk premium averages
about 6.5% across both our best practice companies
and fnancial advisors, the range oI values starts Irom a
low of around 4% and ends with a high of 9%.
Monitoring for changes in WACC should be keyed to
major investment opportunities or signifcant changes in
fnancial market rates, but should be done at least annual-
ly. Actually fowing a change through a corporate system
of project appraisal and compensation targets must be
done gingerly and only when there are material changes.
WACC should be risk-adjusted to refect substantive diI- WACC should be risk-adjusted to refect substantive diI-
ferences among different businesses in a corporation. For
instance, fnancial advisors generally fnd the corporate
WACC to be inappropriate for valuing different parts of
a corporation. Given publicly traded companies in diIIer-
ent businesses, such risk adjustment involves only mod-
est revision in the WACC and CAPM approaches already
used. Corporations also cite the need to adjust capital
costs across national boundaries. In situations where
market proxies for a particular type of risk class are not
available, best practice involves fnding other means to
account for risk differences.
Best practice is largely consistent with fnance theory.
Despite broad agreement at the theoretical level, however,
several problems in application can lead to wide divergence
in estimated capital costs. Based on our results, we believe
that two areas of practice cry out for further applied research.
First, practitioners need additional tools for sharpening their
assessment of relative project and market risk. The variation
in company specifc beta estimates Irom diIIerent published
sources can create substantial differences in capital cost
estimates. Moreover, the use of risk-adjusted discount rates
appears limited by lack of good market proxies for different
risk profles. We believe that appropriate use oI comparable-
risk, cross-industry or other risk categories deserves further
exploration. Second, practitioners could beneft Irom Iurther
research on estimating the equity market risk premium.
Current practice still relies primarily on averaging past data
over often lengthy periods and yields a wide range of estimates.
Use of forward-looking valuation models to estimate the
implied market risk premium could be particularly helpful
to practitioners dealing with volatile markets. As the next
generation of theories sharpens our insights, we feel that
research attention to the implementation of existing theory
can make for real improvements in practice.
In fundamental ways, our conclusions echo those of our
study fIteen years ago. Our conversations with practitioners
serve as a reminder that cost of capital estimation is part of
the larger art of managementnot simply an application
oI fnance theory. There is an old saying that too oIten in
business we measure with a micrometer, mark with a pencil,
and cut with an ax. Despite the many advances in fnance
theory, the particular ax available for estimating company
capital costs remains a blunt one. Best practice companies
can expect to estimate their weighted average cost of capital
with an accuracy of no more than plus or minus 100 to
150 basis points. This has important implications for how
managers use the cost of capital in decision making. First,
do not mistake capital budgeting for bond pricing. Despite
the tools available, effective capital appraisal continues
to require thorough knowledge oI the business and wise
business judgment. Second, be careful not to throw out the
baby with the bath water. Do not reject the cost of capital and
attendant advances in fnancial management because your
fnance people cannot provide a precise number. When in
need, even a blunt ax is better than nothing.

References
Association for Finance Professionals, 2011, Current Trends in Estimating
and Applying the Cost of Capital: Report of Survey Results, www.
AFPonline.org, accessed March 2011.
Banz, R., 1981, The Relationship between Return and Market Value of
Common Stock, Journal of Financial Economics 9 (No. 1), 318.
Barra, 2007, Barra Risk Model Handbook, MSCI Barra, www.Barra.com/
support/library.
Brealey, R., S. Myers, and F. Allen, 2011, Principles of Corporate Finance,
10th ed., New York, NY, McGraw-Hill.
Brigham, E. and M. Ehrhardt, 2013, Financial Management: Theory and
Practice, 14th ed., Mason, OH, South-Western Publishing.
Bruner, R., K. Eades, R. Harris, and R. Higgins, 1998, Best Practices
in Estimating the Cost of Capital: Survey and Synthesis, Financial
Practice and Education 8 (No. 1), 13-28.
Burns, R. and J . Walker, 2009, Capital Budgeting Surveys: The Future is
Now, Journal of Applied Finance 19 (No. 1-2), 78-90.
Carleton, W.T. and J. Lakonishok, 1985, 'Risk and Return on Equity: The
Use and Misuse of Historical Estimates, Financial Analysts Journal
41 (No. 1), 38-48.
Conroy, R. and R. Harris, 2011, Estimating Capital Costs: Practical
Implementation of Theorys Insights Capital Structure and Financing
Decisions: Theory and Practice (K. Baker and J . Martin, eds.), New
York, NY, J ohn Wiley & Sons.
Dimson, E., P. Marsh, and M. Staunton, 2011a, 'Equity Premia Around the
World, London Business School Working Paper.
Dimson, E., P. Marsh, and M. Staunton, 2011b, The Dimson-Marsh-
Staunton Global Investment Returns Database (the DMS Database),
New York, NY, Morningstar Inc.
Fama, E.F. and K.R. French, 1992, The Cross-section of Expected
Returns, Journal of Finance 47 (No. 2), 27465.
Fernandez, P., J . Aguirreamalloa, and L. Corres, 2011, US Market Risk
Premiumused in 2011 by Professors, Analysts and Companies: A
Survey with 5,731 Answers, IESE Business School Working Paper.
Graham, J. and L. Mills, 2008, 'Using Tax Return Data to Simulate
Corporate Marginal Tax Rates, Journal of Accounting and Economics
46 (No. 2-3), 366-380.
Harris, R. and F. Marston, 2001, The Market Risk Premium: Expectational
Estimates Using Analysts Forecasts, Journal of Applied Finance 11
(No. 1), 6-16.
Harris, R. and F. Marston, 2013, Changes in the Market Risk Premium
and the Cost of Capital: Implications for Practice, Journal of Applied
Finance 23 (No. 1), 34-47.
Higgins, R.C., 2012, Analysis for Financial Management, 10th Ed., New
York, NY, McGraw-Hill.
Ibbotson, SBBI, 2012, Classic Yearbook, Market Results for Stocks, Bonds,
Bills and Ination 1926-2011,` Morningstar.
J acobs, M.T. and A. Shivdasani, 2012, Do You Know Your Cost of
Capital? Harvard Business Review (J uly).
Koller, T., M. Goedhart, and D. Wessels, 2005, Valuation: Measuring and
Managing the Value of Companies, 5th Ed., Hoboken, NJ , J ohn Wiley
& Sons, Inc.
Pratt, S. and R. Grabowski, 2010, Cost of Capital: Applications and
Examples 4
th
Ed., Hoboken, NJ , J ohn Wiley and Sons.
Reinganum, M.R. 1981, 'Misspecifcation oI Capital Asset Pricing:
Empirical Anomalies Based on Earnings Yields and Market Values,
Journal of Financial Economics 9 (No. 1), 1946.
Ross, S., R. Westerfeld, and J. JaIIe, 2013, Corporate Finance, 10th Ed.,
New York, NY, McGraw-Hill.

Best Practices Est WACCupdate

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Best Practices Est WACCupdate

Enviado por

Direitos autorais:

Formatos disponíveis

15 BROTHERSON ET AL.

BEST PRACTICES IN ESTIMATING THE COST OF CAPITAL: AN UPDATE

Você também pode gostar