Appendix G  833
Exhibit G.1  Comparing Risk Premiums across Countries and over Time
Annualized market risk premium over 1-year Treasury bills, %
Spain
Ireland
Finland
World1
Italy
Sweden
Netherlands
Portugal
France
Switzerland
Belgium
United States
Japan
Denmark
Norway
Germany
Canada     
United Kingdom
1967–2016
1900–2016
4.2
6.6
7.4
3.7
3.9
4.5
4.8
1.2 
3.0
3.5
3.9
4.8
4.9
5.0
5.1
5.3
5.5
5.8
5.7
4.2
4.6
3.3
3.0
6.1
6.1
4.2
3.2
3.3
3.6
5.5
4.4
6.2
3.6
4.5
5.9
4.0
Source: E. Dimson, P. Marsh, and M. Staunton, Triumph of the Optimists: 101 Years of Global Investment Returns (Princeton, NJ: Princeton University Press, 2002); E. 
Dimson, P. Marsh, M. Staunton, and J. Wilmot, Credit Suisse Global Investment Yearbook 2016 (London: Credit Suisse Research Institute, February 2016).
1 Globally diversified portfolio.
growth have varied over the past century among the countries. Second, capi-
tal markets were less integrated in the past, so prices across countries may 
not have been equalized. The main reason, though, is that many of the stock 
market indexes used had different levels of diversification and beta. There-
fore, their performance was skewed by different industry concentrations. In 
most European countries, the key stock market indexes, which account for 
the majority of their stock markets’ total capitalization, typically include only 
25 to 40 companies, often from a limited range of industries. Indeed, research 
has shown that a large fraction of the variation in returns on European market 
indexes could be explained by their industry composition (see Exhibit G.2).10
10 R. Roll, “Industrial Structure and the Comparative Behavior of International Stock Market Indexes,” 
Journal of Finance 47, no. 1 (1992): 3–42.

834 Appendix G
 We recommend a local CAPM only for investors and companies facing 
restrictions on investing abroad. In that case, the local market portfolio is the 
right reference to estimate the cost of capital. As a result, valuations in such 
restricted markets can be out of line with those in global markets—which is 
what we have encountered in the past for valuations in, for example, Asian 
stock markets. 
Exhibit G.2 Share of Equity Returns Explained by Industry Composition of Index
Adjusted R 2, %
Sweden 
United Kingdom 
Germany 
Netherlands 
France 
Spain 
Switzerland 
Belgium 
Italy 
Denmark 
Finland 
Norway 
50
41
60
61
61
60
62
53
43
46
19
33
Average 49%
Source: R. Roll, “industrial Structure and the Comparative behaviour of international Stock Market indexes,” Journal of Finance 47, no. 1 (1992): 3–42.

835
Appendix H
A Valuation of Costco 
Wholesale
This appendix shows a typical outside-in valuation model, using Costco 
Wholesale as an example. Our historical analysis is based on Costco’s pub-
lished income statements and balance sheets from its 2015 to 2019 annual re-
ports. Companies rarely restate balance sheets more than one or two years 
back in time, so we use original data to avoid confusion. The line item names 
and references to footnotes are worded according to the conventions of the 
2019 annual report.
The valuation process we apply here is detailed in Part Two. The follow-
ing commentary provides an informal guide to each of the exhibits, including 
clarification of items that may not be apparent. We hope our references to 
specific chapters will help readers connect the exhibits to general principles 
explored in the book.
Modeling the Financial Statements
The valuation process begins by modeling the financial statements in a 
spreadsheet, including the income statement, the balance sheet, the statement of 
shareholders’ equity, and the tax reconciliation table. The first three statements 
for Costco are presented in the annual report following the auditor’s letter. The 
company’s tax reconciliation table is found in the notes to the financial statements.
Exhibit H.1: Income Statement. We present the income statement as reported 
by the company, with two exceptions. First, the exhibit separates depreciation 
from selling, general, and administrative expenses. Costco reports deprecia-
tion in its statement of cash flows. Second, we separate interest income from 
other income. We do this to enable the modeling of income generated from 
future balances of excess cash. Costco provides details on interest and other 
income in the section on management’s discussion and analysis.