Wed, Jan 17, 2024

The New Normal: Cost of Capital in a Higher-Interest-Rate Environment

Kroll expert Carla Nunes, CFA, ABV spoke at the 2023 AICPA & CIMA Forensic & Valuation Services Conference in two separate sessions.

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Carla Nunes

Kroll expert Carla Nunes, CFA, ABV, spoke at the 2023 AICPA & CIMA Forensic & Valuation Services Conference in two separate sessions. During the conference, Carla was interviewed by Nene Glenn Gianfala, CPA, ABV, ASA BV/IA, of Chaffe & Associates, Inc. about current economic conditions that impact valuations and the cost of capital. Carla provided an overview of current conditions and discussed projected economic growth. This was followed by a deep dive into the cost of capital and how individual inputs, including the risk-free rate, equity risk premium, betas and cost of debt, are impacted.

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The following are some highlights of the discussion:

1:50—What are some of the global economic trends impacting valuations and cost of capital?
5:00—There is so much information out there on historic and projected growth and where the economy is going. Which resources can valuation professionals use for the best information?
7:08—What is the U.S. Federal Reserve going to do, and what is the outlook for interest rates and the associated impact on the risk-free rate?
11:15–What is the outlook for the equity risk premium? Should we use historical realized ERPs as proxies for the future?
16:26—Could Kroll recommend that the U.S. change ERPs in the near future?
17:53—Some of the ERP models broke down during COVID-19. Why should you look at multiple models when arriving at your ERP estimate?
21:20–Betas in some industries went up in the aftermath of COVID-19 while others went down. Are betas stabilizing now or will they go back to pre-pandemic levels? What were some of the most impacted industries?
24:40–How is the cost of debt for individuals and businesses impacted by the current interest rate environment?
29:50–Repercussions of higher cost of debt on M&A activity in the current environment and outlook for 2024.

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