COE Estimates From Leading Data Sets Are All ‘Very Close’

“Kroll, BVResources, and Pepperdine discount rates were very close,” writes Jim Hitchner (Financial Valuation Advisors Inc.) after putting the three data sets through their paces in a case study.¹ They all produced a cost of equity (COE) rate in the range of 18% to 19% for a valuation date of Jan. 1, 2022. Hitchner also used a fourth data set, from Dr. Aswath Damodaran (New York University), in the same case study, and the results were an “outlier” because the professor adjusts cash flows instead of adjusting the discount rate for size and company-specific risk.

The results reinforce a similar case study Hitchner did a few years ago, when he used the Kroll (then Duff & Phelps) Navigator and BVR’s Cost of Capital Professional for the same valuation and the discount rate output was “not that much different,” he said at the time.² Hitchner is a veteran valuation expert, thought leader in the profession, and author of one of the seminal valuation texts, Financial Valuation Applications and Models.³

Survey of usage. At the Virginia Society of CPAs’ Forensic and Valuation Conference this past September, Hitchner presented the results of a survey he conducted in July 2022 that asked about the data sets practitioners use. The question was: What cost of equity data do you currently use? (pick all that apply)

Kroll Navigator—79%;
BVResources COC Pro—23%;
Damodaran’s data and analyses—18%;
Pepperdine survey data—11%; and
Other or none of the above—9%

A little bit of background here. Both the Kroll Navigator and BVR’s Cost of Capital Professional are Web-based applications designed to help estimate the cost of capital of private firms. The Navigator launched in early 2018 and was the result of the transitioning of the then Duff & Phelps Valuation Handbook series from print to an interactive online application. The Navigator has a massive amount of data, methodologies, and output, and Kroll has stated that using it is just like having its cost of capital experts “sitting right at your side.”⁴

BVR’s Cost of Capital Professional launched in late 2018 as a simple, less costly, independent alternative designed to enhance professional judgment, flexibility, and common sense in a process that is in danger of becoming a complex “black box” of applied mathematics. The platform integrates data from multiple sources, including the University of Chicago’s Center for Research in Security Prices (CRSP) database, Damodaran’s data library, and the U.S. Federal Reserve. The platform has certain default options, but users have the freedom to decide whether to use those options.⁵ Damodaran’s website provides (free of charge) an extensive amount of free data on risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and more. He uses an “implied” ERP, a forward-looking method as opposed to the “historical” ERP. He calculates the implied ERP by backing it out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond.⁶

The Pepperdine survey is an ongoing project at the Pepperdine University Graziadio Business School that conducts an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers.⁷

Case study results. In Hitchner’s case study, the Kroll calculations resulted in an 18% discount rate, while the BVR Cost of Capital Professional calculations resulted in a 19% discount rate. The Pepperdine calculations (from the 2021 report) resulted in a discount rate of 18%. The Damodaran discount rate was 8%, but, as mentioned above, this does not include adjustments for size or company-specific risk factors.

In the Hardball publication, Hitchner goes into great detail about all four data sets and the results of the case study.

¹ "New Cost of Equity Capital Case Study: Kroll vs. Business Valuation Resources vs. Damodaran vs. Surveys," Hardball With Hitchner, Issue 24, October 2022; valuationproducts.com/hardball-with-hitchner.

² “BVR and Duff & Phelps Cost of Capital Platforms Go Head-to-Head at VSCPA,” Business Valuation Update, Vol. 25, No. 11, November 2019.

³ bvresources.com/products/financial-valuation-applications-and-models-website-4th-edition.

⁴ kroll.com/en/cost-of-capital.

⁵ bvresources.com/products/cost-of-capital-professional.

⁶ pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html.

⁷ privatecap.org/pcm_report.