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Markets versus textbooks: Calculating today’s cost of equity

Harmony Internal - McKinsey

Grasp the complexity ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ 

Brought to you by Liz Hilton Segel, chief client officer and managing partner, global industry practices, & Homayoun Hatami, managing partner, global client capabilities

Cast your mind back to Finance 101: inflation leads to higher interest rates. That checks out. And higher interest rates mean a higher cost of equity—right? Actually, not really. According to new McKinsey research, the cost of equity has been decoupled from government bond rates over the past 15 years or so. That’s because monetary policy has manipulated long-term rates to the extent that Treasury yields no longer reflect what the market actually applies. For guidance, a new article by McKinsey solution manager Vartika Gupta, writing in concert with David Kohn, a McKinsey associate partner, and McKinsey partners Tim Koller and Werner Rehm seeks to challenge the textbook approach to identifying the appropriate risk-free rate and provide a more evidence-based approach to valuations.
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—McKinsey partner Mahima Chugh on how leaders in Asia can navigate volatility in “Inflation in Asia: How leaders can prepare for volatility”

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— Edited by Stephanie d’Arc Taylor, editor, Southern California
McKinsey & Company

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by "McKinsey Daily Read" <publishing@email.mckinsey.com> - 05:12 - 26 Jan 2023