Building Value Newsletter Volume X, Issue I

A Business Valuation Newsletter for Business Owners and the Professionals Who Advise Them

Is the Traditional Risk-Free Rate Still Risk Free?

As we all know, on August 5, 2011 Standard & Poor’s lowered its rating of long-term U.S. federal debt to AA+, thereby removing the United States from its list of risk-free lenders for the first time. While much has already been written on this groundbreaking decision, from a business valuation standpoint one central concern stands out – is the long-term U.S. federal bond rate still the default option for the risk-free rate in cost of equity calculations? In this brief article, we discuss this question and raise some thoughts about how we might refine calculating the cost of equity.

While much has already been written on this groundbreaking decision, from a business valuation standpoint one central concern stands out – is the long-term U.S. federal bond rate still the default option for the risk-free rate in cost of equity calculations? In this brief article, we discuss this question and raise some thoughts about how we might refine calculating the cost of equity.

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