Determination of beta factors and Cost of Capital

The cost of capital is to be used as the discount rate when discounting cash flows relevant for valuation purposes. Determining the cost of capital is therefore a material component of company valuations.

Valuation standard IDW S1 explicitly refers to the capital markets-based Capital Asset Pricing Model (CAPM or Tax CAPM) for purposes of determining cost of capital on the basis of which cost of capital may fundamentally be broken down into a base interest rate, a beta factor and a market risk premium. In this context, beta represents company-specific risk and measures price fluctuations in the single position (single position risk) compared to the market (market risk).

The beta factor is determined based on a linear regression of yields. In practice, this regularly places the appraiser before a challenge: In the case of privately-held enterprises, this must be determined based on yields of suitable listed companies (“peer group”). In addition, “unlevering” and “relevering” are used to make adjustments to reflect the actual financing situation of the company being valued.

The choice of peer group companies and the proper beta calculation are a constant point of discussion in cases before the courts.

We determine peer groups, beta factors and cost of capital for your valuation.

Our services

  • Identification of suitable comparable companies and determination of date-specific beta factors (download sample excerpt)
  • Date-specific determination of additional CAPM factors (base interest rate, market risk premium)
  • Determination of cost of capital (cost of equity, cost of debt, WACC)
  • Transparent presentation of the results and preparation of relevant sections of the report as needed

Benefits to you

  • Reliable data from valuation specialists
  • Results which comply with IDW S1 and are based on prevailing legal interpretations
  • Transparent documentation of the results and professional report segments for your valuation report


Your contact for beta factors, industry betas and cost of capital: | +49 (0)30 20 39 57 0 ______________________________________________________________________________________________________________________

Cost of capital: Cost of capital represent the return of an alternative investment which is equivalent to an investment in the enterprise to be valued in terms of duration, risk and taxation of the cash flows. This is described as the discount rate.Raw beta: In practice, the historical factor arrived at by means of linear regression is referred to as “raw beta”. Raw beta takes both systemic risk and financing risk into account.Unlevered beta: “Delevering” adjusts raw beta to remove the influence of financing risk by factoring out the debt ratio of the underlying company / peer group. The result of this process is unlevered or asset beta. When performing the valuation, it must be adjusted again to reflect the financing structure of the enterprise being valued (“relevered”). When making these computations, care must be taken to ensure that the debt ratio is always determined based on market value and not book value.

Adjusted beta: “Adjusted beta” is a beta factor adjusted on the basis of “raw beta”. The rationale for the adjustment is the assumption that the accurate, future beta of a security over the long term will trend in the direction of the market average (1.0). Low beta values are adjusted up and higher beta values are adjusted down.

Total beta: One of the core presumptions of CAPM is complete diversification of investors who, in this manner, may eliminate non-systemic risks of an investment. However, non-systemic risk cannot generally be eliminated precisely in the case of a limited group of shareholders or a lack of or low degree of diversification on the part of investors. This is typical in the case of privately-held, small and medium-sized enterprises (SME). The total beta approach likewise takes non-system risk of an investment into account and in practice results in a modified CAPM. Note: We generally indicate total beta as well even where the complete diversification criterion is satisfied.

Base interest rate: For purposes of determining the base interest rate, which is often described in practice as the risk-free rate or base rate, the yield curve as referred to in IDW S1 (IDW: Institute of Public Auditors in Germany) is often relied upon for practical purposes and is to be seen as the best estimator of market performance according to the IDW. This is determined on the basis of parameters published each trading day by the Deutsche Bundesbank since 1997 based on the Svensson Method. For purposes correcting for potential market fluctuations and to compensate for any estimation errors, we have computed a three-month average interest rate as of the relevant issue date when calculating sector betas in conformance with IDW. This was done using a uniform base interest rate based on an equivalent present value.

WOLLNY WP has created the base interest rate calculator BaseRateGuide® with enables the yield curve and the base interest rate to be calculated precisely as of a given date. You may find the BaseRateGuide® here.

Market risk premium: Following the introduction of the tax on price gains (Kursgewinnbesteuerung) effective 1 January 2009, the FAUB (IDW Expert committee on enterprise valuation and business management) recommends a range of market risk premiums based on personal tax rates of 4.0% to 5.0% (mean 4.5%) for purposes of valuation cut-off dates. This recommendation is based on a study by Prof. Stehle who investigated risk premiums in the German capital markets between 1955 and 2003. In light of the crisis in the financial markets, the FAUB, in papers dated 10 Jan. 2012 and 19 Sept. 2012, recommends a range of 5.0% to 6.0% based on personal tax rates (mean 5.5%) for purposes of determining the capitalisation rate associated with an enterprise valuation. For purposes of determining our sector betas, we have been using both the mean of the current FAUB recommendation (5.5%) and the mean of the previous FAUB recommendation (4.5%) since January 2013.

Personal taxes: As part of the Tax-CAPM process, the base interest rate is reduced by income taxes imposed on the owner, whereby the withholding tax plus solidarity surcharge at the current rate of 26.375% is used in accordance with the pronouncements of the IDW. The market risk premium of 4.5% represents an after taxes figure