For the industry specific cost of capital derivation on the respective valuation date (monthly), of the MSCI World Index (Developed Countries) are classified into industry groups according to the Global Industry Classification Standard (GICS). The industries include:
The discount rate is based on the weighted average cost of equity and debt capital (so-called weighted average cost of capital; WACC). Therefore, the weighting reflects the relative percentages of equity and debt in the company´s capital structure. For the determination of the capital structure, the median is used for each industry group. For functional purposes, the weighted average cost of capital is broken down into the components, cost of equity and cost of debt capital, while being calculated.
For the industries banking and insurance, only the components of the cost of equity are included.
The mentioned cost of capital derivation is executed on a EUR basis. No country risk premium or inflation differential is taken into account.
2.1.1. General information
Cost of equity is measured against the (expected) return on an adequate alternative capital investment. While determining objectified business values, the alternative investment and the corresponding yield are generally characterised by an investment in a bundle of publicly listed corporate shares (stock portfolio), adjusted to incorporate the risk structure of the business to be valued.
The adjustment to the risk structure of the valuation object is carried out within the context of an indirect classification of personal income taxes (“mittelbare Typisierung”) on the basis of the capital asset pricing model (“CAPM”). For the derivation of the cost of equity, the components risk-free rate and risk premium (market risk premium and beta factor) are differentiated.
2.1.2. Risk-free rate
In accordance with the recommendations of the IDW, the determination of the appropriate risk-free rate is based on a yield curve, which is determined by taking into account the current interest rates as well as interest structure data published by the German Central Bank (“Deutsche Bundesbank”). The applied interest structure data consists of estimates, which have been calculated on the basis of observed current yields of (quasi) risk-free coupon bonds, i. e. government bonds, government debentures and treasury bills.
The determined yield curve establishes the connection between interest rates and terms to maturity applicable for zero bonds with no credit default risk. The use of zero bond factors with an adequate term to maturity derived from the yield curve ensures the necessary compliance with the term to maturity equivalence between the alternative investment and the financial surpluses that are to be valued.
2.1.3. Beta factor
For the derivation of the beta factors, the median of the indebted beta factors (raw) of the individual companies of the respective industry group, derived from the market, is used. The monthly returns over a period of five years (60 data points), taken from the price data, converted into EUR, of the capital market information service provider S & P Capital IQ, are applied. The MSCI World Index with its price data, also converted into EURs, is respectively selected as a reference index.
2.1.4. Market risk premium
The future anticipated market risk premium can be estimated on the basis of the historical difference between the returns on securities carrying risks, for example, on the basis of a stock index and the returns of (quasi) risk-free capital market investments. Empirical studies of the German capital market have shown that investments in shares, depending on the period of observation, have achieved an average of 4% to 7% higher returns in the past than (quasi) risk-free capital market investments. In light of the current German tax legislation a range of 5.5% to 7.0% is assumed for the market risk premium before personal income taxes.
2.2.1. Risk-free rate
The same interest rate as for the derivation of the cost of equity is used.
2.2.2. Credit spread
The credit spread with an equivalent maturity of 20 years is derived on the basis of the ratings observable on the capital market or the credit model scores for each industry group (median), provided by S&P Capital IQ, (effective interest method).
2.2.3. Tax Shield
While determining the WACC, also the deductibility of debt interest with regard to potential tax payments (so-called tax shield) has to be considered. As operating income tax rate, the average German company tax rate of 29.72% was used.
The equity and debt ratio for the calculation of the weighted average cost of capital, are derived based on the industry group´s average indebtedness (Gearing). Within the definition of the (net) indebtedness of the companies in an industry group, in addition to financial debt, pension provisions are also taken into account and all liquid funds are deducted (Net debt).
For the derivation of the trading multiples for each industry (for banking and insurance see below), the quarterly company specific multiples, published by S&P Capital IQ, are used. The multiples are calculated on the basis of future oriented benchmarks (analyst estimates, reference time + 1 year). For the derivation of the industry specific multiple, the median is determined respectively. The depicted multiples are so-called entity multiples.
EBITDA multiple: Entity value / earnings before interest, tax, depreciation and amortisation
EBIT multiple: Entity value / earnings before interest and tax
The depicted multiples for the industries banking and insurance are so-called equity multiples.
Price-earnings ratio (P/E ratio): market capitalisation / net income
Price-to-book ratio (P/B ratio): market capitalisation / book value of equity