Page 22 - Economic Damage Calculations

Average Annual Re- Standard Deviation:
Type of Investment turn: 1926–2010 1926–2010
Short Term Treasury Bills 3.70% 3.10%

Long Term Treasury Bills 5.90% 9.50%
Long Term Corporate Bonds 6.20% 8.30%
Large Company Stocks 11.90% 20.40%

Small Company Stocks 16.70% 32.60%
Inflation Rate 3.10% 4.20%
Source: Ibbotson Associates/Morningstar, 2011 Valuation Yearbook.

The spectrum of discount rates implied by these measures can be illustrated as presented in figure 3-2,
with higher returns generally expected on investments that have a wider range of possible actual returns.

Figure 3-2

The Cost of Equity

In some situations, a cost of equity may be an appropriate estimate of a discount rate, especially when
the investment may be best evaluated with analogous investments that are 100 percent equity-financed.

The following discussion summarizes some of the common models used to estimate the cost of equity. fn
4 These modes focus on inputs that include the following.

fn 4 Information necessary to derive the cost of equity capital in each of the models set forth subsequently in the text can be obtained
from a variety of sources, including Morningstar/Ibbotson: Stocks, Bonds, Bills & Inflation Valuation Edition Yearbook; the Wall
Street Journal; the Federal Reserve; Duff & Phelps; and Bloomberg.

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