The equity risk premium (ERP) and risk-free rate are foundational inputs to any discount rate developed under the capital asset pricing model or its build-up variants. Recent volatility in published guidance makes the valuation date more consequential than usual.

Recent guidance. Kroll, a widely referenced source of cost of capital data, raised its recommended U.S. ERP from 5.0% to 5.5% on April 15, 2025, citing heightened uncertainty following the escalation in trade tensions. It returned the recommendation to 5.0% as of September 2, 2025, and reaffirmed 5.0% in March 2026 and again as of September 2, 2026. The recommended ERP is paired with the higher of a 3.5% normalized U.S. risk-free rate or the spot 20-year U.S. Treasury yield as of the valuation date.

Why the valuation date matters. Retrospective valuations for estate tax, ASC 350 impairment testing, or litigation should apply the guidance in effect as of the valuation date, not the guidance in effect when the report is prepared. A valuation date between April 15 and September 1, 2025, for example, falls within the 5.5% period.

Beyond the ERP:

  • Match the risk-free rate to the ERP. The ERP should be paired with the risk-free rate methodology it was developed with, rather than mixing sources.
  • Put specific risks in the cash flows where possible. Tariff, supply-chain, and customer-concentration risks are often better captured through scenario-weighted cash flow forecasts than through an unsupported company-specific risk premium.
  • Reconcile to transaction evidence. In a business combination, the internal rate of return implied by the purchase price and the weighted average return on assets should reconcile to the selected weighted average cost of capital.
  • Document the support. Size premiums, company-specific adjustments, and debt cost assumptions should be sourced and explained, particularly for valuations subject to audit or IRS review.

Capto Advisors develops discount rates consistent with ASC 820, Revenue Ruling 59-60, and current market evidence. Contact us to discuss your valuation needs.