FVC2326. The New Normal: Cost of Capital in a Higher Interest Rate Environment

While 2022 began with a new record high for the S&P 500 index, optimism quickly faded, with the index collapsing 19% by year-end (in price terms). Russia invaded Ukraine in February 2022, U.S. inflation reached a 41-year record high in June 2022, and the Federal Reserve (Fed) embarked on one of its most aggressive rate hiking cycles in history. Equity markets have recovered most of their losses in 2023, but there is still uncertainty on whether the Fed will achieve a soft landing for the U.S. economy, as it continues to raise interest rates. These headwinds mean that companies are now facing a higher cost of capital that matches the levels last seen during the 2008-2009 Global Financial Crisis. Our session will unpack the latest economic and financial market developments that have an impact on valuations and cost of capital estimates.

Learning Objectives:

• Identify the current U.S. economic and financial market conditions that may have an impact on cost of capital estimates
• Analyze the effect of a higher inflationary environment on U.S. real GDP growth projections and repercussions on a company's projected revenue growth and profit margins
• Compare major central banks policies of “higher for longer” and how they are changing the expectations for future discount rates
• Determine the impact of higher interest rates on cost of debt and cost of equity estimates