Cost of Capital Study 2019

The Calm Before the Storm – Rising Profits and Deflated Values? This study is an empirical investigation with the aim of analyzing management practices. Information provided and explanations offered by the study do not offer a complete picture for deriving financial forecasts or costs of capital nor for proper actions or interpretation of the requirements for impairment tests, other accounting-related questions or business valuations.

When considering the following analyses, it should be noted that the company data presented here stems from companies from different countries, partially with different currencies and at varying points in time. Furthermore, it should be noted that not all participants of the study have answered all questions. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Preface

Dear Readers, – Changing markets and industries?! We hope that this year’s Cost of Capital Study also – A changing landscape for the automotive industry meets your expectations and serves as interesting It is our pleasure to present you with the results of – Data driven omnichannel models reading. We will gladly discuss the results with you the fourteenth edition of our Cost of Capital Study. – Chemical industry and the challenge of climate within the framework of a personal appointment This year’s number of participants increased to 312 change and are, of course, available for any questions and (previous year: 276) and therefore attained, once – Finding the balance in industry 4.0 comments you may wish to offer. again, a new record level. We would like to express our heartfelt gratitude to all those companies which As a reference point, the collection of empirical With best regards, took part. The large, annually increasing number of data is based on the IFRS (International Financial participants demonstrates once more that the study Reporting Standards) impairment test, as this test is a fixed component in your practical valuation itself and its related valuations are mandatory for all work. We therefore hope that this year’s study and IFRS users. the key topics contained therein will be of particular interest to you. Supplementary to the current study, we would like to direct you to the interactive opportunities In the current issue, we examine the impact of for analysis of the data on our website at regulatory interventions, scarcity of resources, www.kpmg.de/cost-of-capital. There you can digitalization as well as economic risks after a long- compile the parameters relevant for your company Dr. Marc Castedello Stefan Schöniger term upswing in financial forecasts and cost of and/or industry and use them to perform your own, Partner Partner capital. tailor-made assessment. Deal Advisory, Valuation Deal Advisory, Valuation KPMG AG Wirtschafts- KPMG AG Wirtschafts- Consequently, we have chosen the motto “The Furthermore, we collate the relevant cost of capital prüfungsgesellschaft prüfungsgesellschaft Calm Before the Storm – Rising Profits and Deflated parameters in an interactive dashboard for you on a Values?” for this year’s Cost of Capital Study. Based monthly basis. With KPMG Valuation Data Source on this theme, we focus on the following subjects: (www.kpmg.de/kpmg-valuation-data-source) you have access to reliable parameters on the cost of capital for more than 150 countries – anywhere and anytime. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists ’15 ’16 ’17 ’18 ’19 Editions of

the Cost of DEAL ADVISORY, VALUATION Cost of Capital Study 2016 Cost of Capital Study 2017 Cost of Capital Cost of Capital Cost of Capital Study 2015 Value measurement – quo vadis ? Diverging markets – converging business models Value enhancement in the interplay Study 2018 Study 2019 of risks and returns New Business Models – The Calm before the Storm – Capital Study Risks and Rewards Rising Profits or Deflated Values? by KPMG

Highlighted –– Corporate Economic Decision –– New methods for value –– Macroeconomic –– Innovative business models – –– Changing markets and Assessment measurement?! uncertainties – part of opportunity and risk at the industries?! subjects –– Consideration of performance –– Big Data and business financial forecasts same time –– A changing landscape for the and risk drivers analytics tools –– Microeconomic change – –– Disruptive business models – automotive industry of the study –– Stress testing in times of –– Risk transparency and risk predictability of disruptive one person’s joy, another’s –– Data driven omnichannel higher volatility management business models suffering models –– Quantification of operative –– Value-based management –– Cost of capital – the –– Internationalization –– Chemical industry and the risks systems 2.0 challenges of low interest of business models – challenge of climate change –– Effects of the low-interest rates, populism, and new opportunity and risk at the –– Finding the balance in phase technologies same time industry 4.0 –– Paradigm shift in the deter –– Cost of capital – comparative –– The optimal company mination of the market risk measures in a world that portfolio – premium increasingly defies necessity of quantifying comparison strategies –– Value enhancement as a decision-making metric –– New valuation methods in disruptive times? © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Summary of Findings

Growth expectations WACC Beta factors Investment decision In the industries under The average WACC across industries The highest unlevered beta factors Investment decisions continued consideration, different was at 6.9 percent and therefore on the were applied by the Automotive and to be made by the majority expected growth rates were same level as in the previous four years. Technology sectors; the lowest for this of participants based on both forecasted for EBIT and sales. The highest WACCs were applied in the survey period was measured in the strategic as well as value-based The highest EBIT growth is Automotive sector with 8.2 percent and in Real Estate as well as in the Energy & objectives. expected in the Chemicals & the Technology sector with 8.1 percent. Natural Resources sectors, followed by Page 37 Pharmaceuticals and Technol the Media & Telecommunications and The lowest WACC was observed in the ogy sectors and the lowest Transport & Leisure sectors. Energy & Natural Resources sector with EBIT growth in the Energy & 5.2 percent and in the Real Estate sector Page 26 Natural Resources sector. with 5.4 percent. Page 13 Page 19 Monitoring Most participants continued to consider value-based Planning uncertainty Risk-free rate Cost of debt monitoring of investment decisions as important and Planning uncertainty at the After last year’s increase, the average The average cost of debt stayed almost observed in particular the macroeconomic level continues risk-free rate remains nearly constant at constant with a slight increase of 0.1 per change in performance more to increase. 1.2 percent. centage points to 2.9 percent. The implied than the change in risk (cost In addition to risks resulting However, in recent months the average credit spread – defined as the of capital). from disruptive digitalization risk-free rate declined significantly to difference between the cost of debt and Page 40 developments and innovative 0.2 percent in the Euro zone and to the risk-free rate – amounts to 1.7 percent business models, political risks -0.2 percent in Switzerland. according to this year’s study results. such as the ongoing trade war Page 22 Page 31 between USA and China are on

the rise. To date, economic risks and Market risk premium Capital market communication customer risks have been in particular given consideration The average market risk premium applied remained stable at The cost of capital was, as in the previous years, less in financial forecasts. 6.5 percent. By contrast, the market risk premium in Germany relevant in capital market communication and was primarily Page 17 and Austria increased compared to the previous year. used only for accounting and reporting purposes. Page 23 Page 41 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 1 Introduction © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Study participants Study participations by region 01 Total 312 With a total of 312 participating companies 300 240 (previous year: 276) including 240 participants 276 from Germany, 31 from Austria and 41 from 216 250 Switzerland, this year’s Cost of Capital Study once again achieved a new record 205 number of participants. 200 196 153 148 Compared to the preceding year, the number 150 148 of DAX-30 companies taking part slightly 130 102 declined to 25, resulting in a high response rate 87 of 83 percent nevertheless. At 68 percent, the 100 proportion of MDAX companies is considerably higher compared to the previous year’s level of 31 50 30 62 percent. 19 18 11 17 41 32 29 29 34 30 In addition, companies from ATX and SMI 0 participated with a total of 30 percent and 2013 / 2014 2014 / 2015 2015 / 2016 2016 / 2017 2017 / 2018 2018 / 2019

75 percent, respectively. Germany Austria Switzerland Source: KPMG in Germany, 2019

Survey period Participation rates by index 02 (in percent) The survey of the companies occurred between March and July 2019. The reporting 100 dates of the consolidated financial statements 80 83 included in the study were between 75 28 February 2018 and 31 March 2019. 60 68

40 50 42 20 30

0 17 DAX-30 MDAX SDAX TecDA X FamDAX ATX SMI

Germany Austria Switzerland Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Analyses Study participations by industry 03 Total (multiple choices possible) As in all previous studies, the participating 80 companies were requested to assign 72 70 themselves to industries in accordance with 30 68 their business activities. The current study 30 therefore contains overviews of all the material 60 financial forecast parameters and cost of capital 50 parameters according to industries. 48 45 18 45 40 16 8 Compared to the previous year, especially 39 39 42 36 37 the sectors Energy & Natural Resources, 13 4 38 15 37 4 33 30 30 35 Technology, Chemicals & Pharmaceuticals 28 33 12 29 10 30 26 26 as well as the Automotive sector showed a 6 29 25 7 26 3 3 2 23 23 20 significant increase in participating companies. 22 23 18 18 23 23 8 5 22 21 20 16 21 6 6 18 12 5 10 15 12 12 5 11 7 0 Auto- Chemicals Consumer Energy & Financial Health Industrial Media & Real Techno- Transport & motive & Pharma- Markets Natural Services Care Manu- Tele- Estate logy Leisure ceuticals Resources facturing communications 2017 / 2018: 2018 / 2019: Family-owned companies Family-owned companies Non-family-owned companies Non-family-owned companies Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Online industry analyses Study participants by sub-sectors 04 Total (multiple choices possible) At https://hub.kpmg.de/cost-of-capital- 25 25 25 study-2019 you will find the financial forecast 20 23 and the cost of capital parameters from the 15 19 10 13 current study as well as the results of the Cost 12 12 11 5 8 of Capital Studies from previous years in a clear, 6 0 5 3 self-explanatory presentation. These include Chemi- Pharma- Other Consumer Retail Other Banking Insurance Other Media Tele- Other figures for all industries as well as for the cals ceuticals Chemicals Markets Consumer Financial communi- Media sub-sectors of Consumer Markets, Chemicals & & Pharma- Markets Services cations & Tele- Pharmaceuticals, Media & Telecommunications ceuticals communications and Financial Services. Chemicals & Pharmaceuticals Financial Services Consumer Markets Media & Telecommunications Source: KPMG in Germany, 2019 In addition, we provide you with an individual and interactive data analysis of the study results there. Using your own search criteria, you can generate the data relevant for you and therefore better grasp the values and developments of the cost of capital parameters essential to your situation.

As in previous years, you will also find additional insights regarding the performance of impairment tests. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 2 Derivation of the Cash Flows

2.1 Preparation of the Financial Forecasts

2.2 Growth Expectations

2.3 Determination of Expected Values

2.4 Consideration of Risks © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 2.1 Preparation of the Financial Forecasts

Financial forecasts inherit a high degree of Degree of detail of the financial forecasts economical unpredictability and thus a lack of 05 Total (in percent) planning certainty. 60

50 Therefore, the financial forecast has to 51 51 properly reflect the expected development 40 of the underlying operating performance and risk drivers. For this purpose, financial 30 33 33 forecasts should be integrated and prepared in 20 a sufficiently detailed manner. 10 16 16 Sensitivity and scenario analyses are able to 0 capture future fluctuations in the company’s Forecast Forecast of a P&L Completely integrated performance and therefore provide a only of a P&L and additionally (P&L, balance sheet framework to account for uncertainty in selected balance sheet and cash flow) enterprise valuations. items or a complete balance sheet

Furthermore, the proper accounting for cash 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 flow sensitivity requires a simultaneous risk equivalent adjustment of the cost of capital. Consideration of sensitivities Otherwise, the risk equivalence between 06 Total (in percent) numerator and denominator is not given and 50 the valuation results are biased. 40 40 30 36 28 30 20 21 17 15 10 13

0 Cash flow Cost of capital Both, cash flow and No sensitivities (amongst others sales, (including sustainable cost of capital EBITDA, EBIT) growth rate)

2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists The choice of the planning period remains a Number of segments Number of cash generating units (CGUs) matter of some incongruity. Although a longer 07 Total (in percent) 08 Total (in percent) planning horizon is accompanied by growing 30 30 planning uncertainty, a (too) short planning 28 25 25 horizon means that investments, product 26 24 25 life cycles as well as long-term industry 20 22 20 22 21 developments are not properly reflected in 19 20 the financial forecast. This leads to erroneous 15 17 15 17 14 15 15 company valuations and may then result in 13 10 12 10 12 11 11 inappropriate decisions. 9 9 10 10 5 7 5 6 According to the regulation of the International 5 0 0 Accounting Standard (IAS) 36.33 (b), the One Two Three Four Five Six Seven One Two to Four to Seven Ten to Sixteen financial forecasts in case of the value-in- seg- seg- seg- seg seg seg or more CGU three six to nine fifteen or more use concept should in principle not exceed a ment ments ments ments ments ments seg- CGUs CGUs CGUs CGUs CGUs planning horizon of five years. Given plausible ments product and investment cycles, a longer 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 planning horizon can be justified.

Planning horizon 09 Total (in percent, multiple choices possible)

40 45 42

30 36 36

10 16 16 14 12 10 3 2 2 2 0 2 1 1 1 1 7 0 One Two Three Four Five Six Seven Eight Nine Ten or more budget planning planning planning planning planning planning planning planning planning year years years years years years years years years years

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 2.2 Growth Expectations

The primary premises for preparing the Forecasted sales growth by industry Forecasted growth of EBIT by industry financial forecast are assumptions regarding 10 (in percent) 11 (in percent) the expected growth of several items of the 5.6 6.5 Automotive Automotive profit and loss statement (P&L). In particular, 6.6 7.7 the growth expectation of sales as well as 5.1 11.5 Chemicals & Pharmaceuticals Chemicals & Pharmaceuticals achievable results in the future, such as 4.6 9.1 earnings before interest, taxes, depreciation 4.7 6.9 and amortization (EBITDA) and earnings Consumer Markets Consumer Markets 5.6 6.9 before interest and taxes (EBIT), are of primary 3.5 3.8 interest. All financial forecasts are influenced Energy & Natural Resources Energy & Natural Resources 0.9 1.4 by developments on the company level as 3.8 n / m well as by future general macroeconomic Financial Services Financial Services 4.7 n / m developments. 5.3 8.6 Health Care Health Care Today’s growth expectations are affected 6.5 8.2 4.7 6.1 not only by the looming Brexit, but also Industrial Manufacturing Industrial Manufacturing by the emerging US-China trade war, 5.3 7.1 3.5 6.7 scarcity of resources as well as the still Media & Telecommunications Media & Telecommunications ongoing digitalization with its future-altering 6.0 6.9 2.7 5.9 technologies. Real Estate Real Estate 4.0 4.9 All these factors as well as new business models 6.4 10.1 Technology Technology have had significant impacts and will continue to 7.3 9.3 affect corporate developments in future. 4.6 8.1 Transport & Leisure Transport & Leisure 6.1 8.0 The above mentioned challenges might be reflected in the decreased forecasted sales 4.4 7.1

Total Total growth rate. While the average forecasted 5.3 7.0 sales growth rate decreased by 0.9 percentage points the average forecasted EBIT growth Family-owned companies 4.7 Family-owned companies 6.4 rate remained stable. The connection of these Non-family-owned companies 4.3 Non-family-owned companies 7.4 forecasts might indicate expected lower cost 1 2 3 4 5 6 7 8 2 4 6 8 10 12 ratios in the future or results from the future manifestation of positive economies of scale. 2018 / 2019 2018 / 2019

2017 / 2018 Source: KKPMG in Germany, 2019 2017 / 2018 Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Changing Markets and Industries?! (1 / 2)

Thesis 1: In the future, economic cycles will be Overall, it can be assumed that – following rather For the European economic region in particular, increasingly overlaid by individual effects bidirectional expectations with regard to the future the ECB’s phase of prolonged low interest rates is (downturn or upswing) – expectations will be much unprecedented; European and American interest Economic developments in recent years have been more multidirectional in the future. rates have thus developed unevenly for some strongly influenced by disruptive effects on existing time. The voices of alarm regarding an approaching business models. Along with the uncertainties downturn and even recession expectations are associated with these disruptions at the more currently on the rise, and only on the stock markets microeconomic level, uncertainties have been do these warnings still not seem to be playing arising at the macroeconomic level. a significant role. 2 The picture is dominated by numerous special effects, both positive and negative. Here, too, it now appears that the former “certainty with regard to uncertainty” – which has to date been reflected in steady economic cycles – will in future be exposed to increasingly complex individual issues.1

There is some controversy, for instance, about the extent to which the “America First” politics of the current US President, the ongoing Brexit process, or the newly aligning, regionally varying lack of resources such as human capital, land and capital, but also of raw materials and certain intellectual Thesis 2: A downturn need not necessarily property for future key technologies can weaken follow the upswing or magnify the global economic cycles, or that completely different regional impacts may occur. We are currently in a longer than average phase of an ascending cycle on the capital markets, In addition, protectionist tendencies by some beginning with the last lows on the European stock nations as active attempts to “counteract” as well markets in 2012. There is some debate as to the as the possible exhaustion of monetary policy extent to which the price declines of the recent measures in advance of expected downturns are past have already led to the corrections – which having an unsettling effect. in the past were necessary due to the system and could be observed at regular cyclical intervals – of the current economic phase or not. A look at 1 See Global Trends – Paradox of Progress (2017 Report of the National Intelligence Council), p. 9ff. the macroeconomic indicators does not show a 2 Cf. European Central Bank, Economic Report Issue 2/2019, p. 3ff. uniform trend. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Changing Markets and Industries?! (2 / 2)

Thesis 3: Overvalued unicorns indicate Whether for technological, demographic or overvalued markets regulatory reasons, the resulting positive and negative effects have now assumed orders of The so-called Internet or dot.com bubble burst in magnitude, gained increasing influence on the March 2000. This was preceded by unrealistically overall economic development of entire economies high profit expectations on the part of investors and decoupled from the general economic cycles in in new technology companies, which had terms of time. become a symbol of numerous new technological developments and triggered a “pioneering mood” This poses major challenges5 not only for the in connection with digital business models. companies and entire sectors concerned, but also Innumerable start-ups found their way onto the for the monetary and fiscal policy institutions that stock markets. set the framework. Companies with the greatest resilience will cope best with the increase in local Investors willingly subscribed to new issues in the and global uncertainties, structural breaks and hope of above-average earnings expectations. disruptions. This led to a broad overvaluation of such companies, the correction of which subsequently This includes rapid adaptation to changing affected the markets as a whole. Even at present Thesis 4: Economic and sector development environmental conditions, financial stability, active there is no agreement at all on the valuation levels decoupled error management, the establishment of new of today’s start-ups. Current studies indicate high forms of cooperation and the ability to take action overvaluations – according to these, overvaluations Currently, there is hardly an industry that does at any time. of up to 50 percent exist, and half of the unicorns not see itself exposed to so-called disruptive would lose this status3. developments. The causes of these disruptions are manifold. Technological change is leading to a What is common to the market situation today horizontal and vertical readjustment of value chains. and back then is that fundamental company data Platform strategies form the basis for completely only justifies a small part of the high valuations. new business models in retail, for example. It remains to be seen to what extent the high Data could become the raw material of the future.4 expectations of investors in the new innovative business models will be met this time. Regional differences in demographic developments – not only from a global perspective, but also within leading industrial nations such as Germany – 3 See Gornall, William, and Ilya A. Strebulaev. Squaring venture capital valuations with reality. No. w23895. National Bureau of Economic pose major challenges for the service sector. Research, 2017 But regulatory changes, such as climate-related 4 KPMG in Germany, Whitepaper “Geschäftsmodelle im digitalen Wandel”, 2018 (https://home.kpmg/de/de/home/themen/2018/10/geschaeftsmodelle-im- requirements for the Energy & Natural Resources digitalen-wandel.html) and Automotive sectors, also lead to transformation 5 See current industry developments in this Cost of Capital Study on pages 21,

29, 33 and 38f. processes on a large scale. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 2.3 Determination of Expected Values

The relatively stable economic situation in Measurement of expected value connection with a long company history made 12 Total (in percent) single-valued estimations of future cash 100 flows a generally sufficient and reasonable forecasting tool in the past. 80 80 79 60 However, in the current economic environment full of uncertainty, the 40 performance and risk drivers can only be 20 systematically and transparently compiled 8 1 with a scenario- and simulation-based multi- 0 9 12 11 0 valued financial forecast. Hence, taking the Single-value Simple scenario Simple scenario Complex scenario analyses increasingly unpredictable macroeconomic estimates as per the (best, normal, worst case) (best, normal, worst case) (for instance, by means of financial forecast and equal weighting of and weighting with varying Monte-Carlo simulations) developments as well as the digitalization the scenarios probabilities of occurrence effects on business models into account, the expected value sought for valuation purposes 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 can no longer be simply determined on the basis of only single-valued planning estimates.

As in the previous year, the major proportion of participating companies applied the single- value estimate for determining future cash flows. This shows that alternative scenarios and thus future performance and risk changes of the prevailing business model are not adequately taken into account in the expected value’s derivation. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 2.4 Consideration of Risks

The derivation of future cash flows is Consideration of risks in the financial forecast – macroeconomic risks characterized by uncertainty and they 13 Total (in percent, multiple choices possible) therefore must be reflected with their 80 expected values. 75 72 60 As a consequence, to derive an accurate 59 55 56 expected value, all opportunities and risks of 51 the operating business – regardless of their 40 41 micro- and macroeconomic nature – must be 32 taken into account in the financial forecast. 20 26 28

Taking current economic abnormalities such as 0 the trade war between the USA and China, the threat of an economic downturn and the long- Economic Regulatory / Currency Political risks Other macro- risks legal risks (for example economic lasting impacts of innovative technologies into conditions protectionism) risks consideration, new challenges are constantly 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 being created at the corporate management level.

In particular, these developments Consideration of risks in the financial forecast – microeconomic risks 14 Total (in percent, multiple choices possible) were acknowledged at the micro- and macroeconomic level by the increased 100 number of types of risk considered within the 80 financial forecasts. Especially, political risks 81 82 have become more relevant compared to the 60 previous year. 56 52 40 48 47 39 36 20 21 19 0 Customer-side risks New technologies / New competitors Supply-side risks Other (for example market digitalization (for example microeconomic and sales risks) supplier networks) risks

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3 Determination of the Cost of Capital Parameters

3.1 WACC Overview

3.2 Risk-free Rate

3.3 Market Risk Premium

3.4 Beta Factor

3.5 Cost of Equity

3.6 Other Risk Premiums 3.7 Cost of Debt and Debt Ratio

3.8 Sustainable Growth Rate © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.1 WACC Overview

The most common discounted cash flow WACC (after corporate taxes) (DCF) method to derive an enterprise value is 15 Total (in percent) the so-called WACC approach. 10

With this approach, the weighted average 8 8.1 8.1 8.2 8.2 cost of capital (WACC) is used to discount the 8.0 7.9 7.9 7.7 7.8 7.1 7.1 7.0 company’s future cash flows. It is calculated 6 6.9 6.9 as the firm’s cost of capital in which both cost 4 of equity and cost of debt are weighted by the respective shares of the market value of equity 2 and the market value of debt to the total entity value. 0 2005 / 2006 / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2017 / 2018 / In the last five years, the WACC has remained 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 almost constant as an average across all Source: KPMG in Germany, 2019 companies.

While consistent principles should be applied in the derivation of the cost of capital and Relevant cost of capital parameters at a glance should also be applied even among different In times of uncertainty, it is more important than ever for companies to keep an eye on cost of capital projects, nearly half of our participants do not parameters in order to be prepared for changing market conditions and protect your company against compare the costs of capital applied in M&A losses. How can companies keep track of the most important capital market data? The KPMG Valuation transactions and investment decisions. Data Source collates relevant KPMG cost of capital parameters, for example the market risk premium, the risk-free interest rate and inflation differential, in an interactive dashboard on a monthly basis. It grants The decisive factor here is not consistency on access to relevant and reliable cost of capital parameters for more than 150 countries anywhere and a value basis of the cost of capital, but rather anytime. Historical cut-off dates are available from 2012 until today. its methodological consistency across the For further information see www.kpmg.de/kpmg-valuation-data-source. various occasions for valuation. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists The overall average WACC and its unchanged WACC (after corporate taxes) by industry level of this year’s survey is also reflected 16 (in percent) Consumer Markets in the heterogeneous development of the 8.2 The heterogeneous development is Automotive individual sectors. While one half of the 8.0 also reflected within the Consumer industries reported a decline in the WACC, 7.3 Markets sector. While the WACC Chemicals & Pharmaceuticals the other half showed an increase. 7.0 for the sub-sector Consumer Markets increased from 6.5 6.8 Consumer Markets percent in the previous year to 7.3 The highest increase compared to the previous 6.5 year was observed in the Real Estate sector, percent, the WACC declined from 5.2 the largest decrease in the Health Care sector. Energy & Natural Resources 6.6 percent to 6.2 percent in the 5.5 Retail sub-sector. Therefore, the n / m gap between the two sub-sectors Financial Services n / m increased from 0.1 percentage 6.6 points in the previous year to 0.9 Health Care 7.6 percentage points. 7.3 Industrial Manufacturing 7.4 Media & Telecom munications 6.6 Media & Telecommunications 6.7 Within the Media & Telecom- munications sector, the gap 5.4 Real Estate between the sub-sectors 4.9 de creased compared to the 8.1 Technology previous year. The WACC declined 8.3 by 0.4 percentage points to 6.7 6.1 percent in the Media sub-sector Transport & Leisure 6.0 and increased by 0.4 percentage points to 6.3 percent in the 6.9 Telecommunications sub-sector.

Total 7.0

Family-owned companies 7.1 Non-family-owned companies 6.8

2 4 6 8 10

2018 / 2019

2017 / 2018 Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists A Changing Landscape for the Automotive Industry

Irrespective of economic developments, the These ecosystems will have both economically According to the KPMG Automotive Executive automotive industry will be confronted with the attractive and less attractive business models. In Survey 2019 (automotive-institute.kpmg.de), the challenge of numerous trends occurring at the same order to achieve the required return on investment automotive industry is ahead of ICT companies in time in the coming years. These trends essentially (RoI), the strategic allocation of investment budgets this regard. include vehicle connectivity and digitization, needs to be analyzed. This will provide transparency changes in the powertrain towards emission-free on the value contributions of different business The imminent shift in the automotive industry from drives, new mobility concepts and autonomous models in the mobility ecosystem. Approaches product focus to customer focus will very likely driving. These challenges will lead to a decoupling like CEDA, the simulation and management model lead to dematerialization at the level of automotive of industry and economic development. developed by KPMG, can be used to support users. In other words, customers will most likely the company in risk versus return considerations shift from owning vehicles towards the use of Each trend in itself requires significant investment, regarding possible business models. mobility services instead. In the medium term, this especially as there is no one global solution for the will lead to an increase in the role of financial service aforementioned trends, but there will be country- Frequently, the development of new business models providers – especially those owned by automobile specific, regional or even local answers to the or the expansion of the existing value chain can only manufacturers – who finance the vehicle fleets of challenges associated with them. These range from be managed through acquisitions. A further risk factor mobility service providers. The balance sheets of the regulatory issues (e.g. approval of autonomous for automotive companies comes into play here. automotive companies will therefore show more and driving, emission regulations) to the availability of In technology-related transactions, the automotive more borrowed capital and the increasing risk from raw materials (e.g. for battery cell components) and industry and in particular automotive suppliers are the swelling financing structure will be reflected in changing customer behavior. often confronted with overpowering technology the cost of capital. companies. The market value of the top 15 Depending on the financial capabilities of a technology companies alone is almost five times as Overall, it is therefore not yet possible to predict who automotive company, investment budgets may have high as that of the top 50 automotive manufacturers will emerge from these developments as the winner to be allocated to selected solutions. However, in and suppliers. This is also reflected in the large cash and who the loser. The only certainty is that there will order to cover the widest possible range of trends, positions available in the technology sector. be significant changes or shifts in the existing value and business models as well, cooperation and joint system. ventures will be an instrument for sharing economic However, the financial possibilities are only one side risks and achieving economies of scale. These of the coin. On the other side of the ecosystem is the cooperations will take place with direct competitors data generation, data sovereignty and data security as well as with companies from industries that associated with vehicle connectivity and digitization, converge with their products in the automotive autonomous driving and mobility services. industry (e.g. information, communications & technology (ICT) companies). Customers will use services from those companies that best meet their need for data security. This The long-term goal will be mobility ecosystems in applies in particular to comprehensive mobility which customers receive simple and seamlessly ecosystems in which a large amount of personal integrated transport and services. data, vehicle data and other information is disclosed. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.2 Risk-free Rate

According to the Capital Asset Pricing Model Average risk-free rate applied (CAPM), the cost of equity can be divided into 17 Total (in percent) the risk-free rate and a premium for taken risks 5.0 with regard to the asset invested in. 4.9 4.0 4.4 4.3 4.3 To ensure equivalence in the maturity, the risk- 3.9 3.0 3.3 free rate applied should be determined taking 3.1 into account the current term structure of 2.0 2.6 interest rates of the relevant central banks. 2.3 1.8 1.0 1.5 1.3 1.2 In order to smooth out abnormal market 0.9 fluctuations in deriving the risk-free rate, an 0 average of the three months preceding the 2005 / 2006 / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2017 / 2018 / valuation date should be calculated. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

While the risk-free rate applied by the Source: KPMG in Germany, 2019 participating companies increased last year, it dropped slightly in this year’s Cost of Capital Average risk-free rate applied Study. 18 Germany / Austria versus Switzerland (in percent)

3.5 A cross-country comparison shows a 3.4 heterogeneous development. In Switzerland, 3.0 the risk-free rate increased – however, a 2.5 2.7 decline was observed in Germany and Austria. 2.5 2.0 1.9 1.9 In the recent months, the risk-free rate 1.5 1.8 1.5 1.6 1.4 1.4 declined significantly. As of August 2019, the 1.0 1.2 1.3 1.3 risk-free rate declined to 0.2 percent in the 1.1 0.5 0.9 0.8 Euro zone and to -0.2 percent in Switzerland. 0 2011 / 2012 2012 / 2013 2013 / 2014 2014 / 2015 2015 / 2016 2016 / 2017 2017 / 2018 2018 / 2019

Germany / Austria Switzerland Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.3 Market Risk Premium

As a parameter not directly observable in the Average market risk premium capital market, the market risk premium is 19 Total (in percent) derived by subtracting the risk-free rate from 7.0 the market return. 6.0 6.5 6.5 6.5 6.1 6.3 5.8 5.8 In October 2019, the Technical Committee 5.0 5.0 5.0 5.1 5.1 5.1 5.2 for Business Valuation and Economics (FAUB, 4.0 4.7

Fachausschuss für Unternehmensbewertung) 3.0 of the Institute of Public Auditors in Germany 2.0 (IDW, Institut der Wirtschaftsprüfer) published an adjustment of the recommended 1.0 bandwidth of an appropriate market risk 0 premium due to the current developments in 2005 / 2006 / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2017 / 2018 / the capital markets and monetary policy of 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 the European Central Bank. Consequently, the Source: KPMG in Germany, 2019 new recommended bandwidth for the market risk premium in Germany ranges between 6.0 Average market risk premium and 8.0 percent (previously 5.5 to 7.0 percent). 20 Germany versus Austria versus Switzerland (in percent)

7.0 The Council of Experts for Business 7.0 6.0 6.6 6.6 6.7 6.6 Administration (KFS/BW, Fachsenat 6.3 6.4 6.4 6.4 6.5 6.0 6.0 6.0 6.0 5.9 5.9 für Betriebswirtschaft) of the Chamber 5.0 5.7 5.7 5.5 5.3 5.3 for Tax Advisors and Auditors in Austria 5.0 5.2 5.0 5.1 5.0 4.0 (KSW, Kammer der Steuerberater und Wirtschaftsprüfer) recommended a nominal 3.0 market return of 7.5 to 9.0 percent at the end 2.0 of 2017. Less the current risk-free rate, this 1.0 results in an approximate market risk premium n/a between 6.0 and 7.5 percent. 0 2010 / 2011 2011 / 2012 2012 / 2013 2013 / 2014 2014 / 2015 2015 / 2016 2016 / 2017 2017 / 2018 2018 / 2019 Individual analyses to determine the market Germany Austria Switzerland Source: KPMG in Germany, 2019 risk premium should always be performed based on the aforementioned ranges recommended by the standard setters. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists As in the previous year, the majority of the Distribution of the market risk premiums of German companies study participants from Germany applied a 21 (in percent) market risk premium between 6.0 and 7.0 50 percent with a significant increase in the category 6.76 to 7.0 percent. 40

36 30 By definition, the market risk premium is an 32 32 industry-independent parameter. Accordingly, 20 24 the market risk premiums applied by the study participants were in a narrow range without 15 10 13 14 any significant differences between specific 13 9 3 7 1 1 industries. 0 0 Below 6.01 to 6.26 to 6.51 to 6.76 to 7.01 to Above 6.0 6.25 6.5 6.75 7.0 7.25 7.25 percent percent percent percent percent percent percent

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Analyses on the historical returns have Change in expected returns in Germany frequently served as the basis for determining 22 (in percent) market returns and consequently the market 9 risk premiums. If an average historical risk-free rate is deducted from such an 8 average historical market return, it is implicitly assumed that the risk premium remains constant over time. On the other hand, if the 7 risk premium is calculated as the difference between the market return and the risk-free 6 rate for different points in time in the past, the risk premium would fluctuate over time. 5

Aside from that, researchers have been 4 applying models for deriving implicit returns for some time and in valuation practice these have become relevant more recently. They 3 enable a future-oriented derivation of returns based on current capital market information. 2 This also takes into account risk premiums that may change over time, which more realistically 1 reflects actual circumstances in the capital markets. 0

In the last two years, the market risk premium resulting from implicit returns in Germany, has been above the range recommended by FAUB. 31.12.2017 31.12.2014 31.12.2015 31.12.2013 31.12.2016 31.03.2017 31.03.2014 31.03.2015 31.03.2018 31.03.2016 30.09.2017 30.06.2017 30.09.2014 30.09.2015 30.06.2014 30.06.2015 30.09.2016 30.06.2018 30.06.2019 30.06.2016

Implicit returns FAUB range (as of 30.09.2019) Market risk premium Risk-free rate

Source: KPMG analysis on the basis of data from S& P Capital IQ © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.4 Beta Factor

As a relative risk measure, the beta factor Average unlevered beta factors by industry Average levered beta factors by industry quantifies the operational risk of a company 23 24 by measuring the volatility of the return of an 1.06 1.16 Automotive Automotive individual asset in comparison to the market’s 0.99 1.13 return as a whole. 0.92 1.01 Chemicals & Pharmaceuticals Chemicals & Pharmaceuticals 0.87 1.09 Even though the beta factor is typically 0.86 1.00 applied to capture the company’s future risk in Consumer Markets Consumer Markets 0.75 0.92 relation to the general market risk, it is usually 0.70 0.95 determined based on historical data and Energy & Natural Resources Energy & Natural Resources 0.71 0.98 serves as an estimator for the future. n / m 1.06 Financial Services Financial Services n / m 1.09 While the concept of a peer group is still the 0.79 0.91 dominant way to determine a beta factor, new Health Care Health Care business models sometimes do not have a 0.85 0.94 0.90 1.09 peer group consisting of a number of listed Industrial Manufacturing Industrial Manufacturing companies. Thus, there might be a need for 0.91 1.10 0.71 0.89 new concepts in the future. Media & Telecommunications Media & Telecommunications 0.79 0.96 0.70 0.96 Since the unlevered beta factor reflects the Real Estate Real Estate operative risk independent of a company’s 0.60 n / a capital structure, the levered beta factor 1.01 1.12 Technology Technology serves as a metric for the equity provider’s 1.04 1.12 systemic risk under consideration of the risk 0.72 0.94 Transport & Leisure Transport & Leisure from debt in the capital structure. 0.69 0.87

While on average the unlevered beta factor 0.84 1.02

Total Total did not materially change across industries, 0.83 1.02 there are relatively strong changes in individual industries. Family-owned businesses 0.91 Family-owned businesses 1.08 Non-family-owned businesses 0.82 Non-family-owned businesses 1.00

0.2 0.4 0.6 0.8 1.0 1.2 0.2 0.4 0.6 0.8 1.0 1.2

2018 / 2019 2018 / 2019

2017 / 2018 Source: KPMG in Germany, 2019 2017 / 2018 Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.5 Cost of Equity

The determination of the levered cost of equity Average levered cost of equity is based on the underlying mathematical 25 Total (in percent) equation of the CAPM using the risk-free rate, 12 the company-specific levered beta factor and the market risk premium. 10 10.1 9.9 9.5 9.5 9.8 9.3 8 9.1 8.9 8.7 8.4 In comparison to the previous year, the levered 8.2 8.0 8.3 8.2 cost of equity applied in this year’s survey 6 results have decreased slightly only due to the 4 slight downward movement in the risk-free rate. 2 The difference in the levered cost of equity between Austria and Germany on the one 0 2005 / 2006 / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2017 / 2018 / hand and Switzerland on the other remained 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 constant and is driven by the high difference between the country-specific risk-free rates Source: KPMG in Germany, 2019 applied. Average levered cost of equity 26 Germany / Austria versus Switzerland (in percent)

10 10.2 9.5 9.5 9.8 9.1 9.4 9.2 9.1 8 9.0 8.8 8.8 8.7 8.5 8.6 8.4 8.1 8.1 8.0 8.1 8.1

6 4

0 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2017 / 2018 / 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Against the background of the unchanged Average levered cost of equity by industry 27 (in percent) Chemicals & average risk-free rate, market risk premium Pharmaceuticals and the levered beta factor, the levered cost 9.3 Automotive The cost of equity applied by of equity is also at the same level as in the 9.4 participating companies in the previous year. 8.4 Chemicals sub-sector increased Chemicals & Pharmaceuticals 8.0 significantly to 8.6 percent In contrast, the cost of equity applied by the 8.0 compared to 7.7 percent in the Consumer Markets participating family-owned and non-family- 7.6 previous year, leading to an overall owned companies differs significantly. increase in the Chemicals & 7.4 Energy & Natural Resources Pharmaceuticals sector. 7.3 8.7 Financial Services 8.7 Media & Telecommunications 7.5 Health Care 8.3 While the cost of equity in the Telecommunications sub-sector 8.7 Industrial Manufacturing remained stable, the cost of 8.9 equity in the Media sub-sector 7.3 Media & Telecommunications decreased significantly by 1.0 7.8 percentage points compared to 6.9 the previous year to 6.9 percent Real Estate n/a in the current year. 8.8 Technology 9.0 7.8 Transport & Leisure 7.4

8.2

Total 8.3

Family-owned companies 8.7 Non-family-owned companies 8.1

2 4 6 8 10

2017 / 2018

2016 / 2017 Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Data driven Omnichannel Models

The consumer climate in Germany has been very the number of stores using a multi-channel approach retail has shown little interest in their clients’ data positive in recent years, low unemployment and a decreased (-21.5 percent).1 compared to the industry as a whole. Even two stable economy have contributed to the positive Two thirds of all German retail companies that have years ago, 15 percent of the retailers surveyed in buying mood of Germans. Moreover, there is no not yet integrated a cross-channel process have this the study “Creating Value with Data” by Bitkom evidence that this will change in the near future. at the top of their investment list. Research and KPMG stated that they were critical of the issue of big data. As the omnichannel However, these fundamentally optimistic prospects They have recognized that a customer-affinity and concept becomes more widespread, the data for consumer goods companies and retail are being efficient linking of all sales channels, including the imbalance between offline and online is increasing. overshadowed by a noticeable technological shift in integration of suppliers and logisticians, ultimately Stationary retail must further develop its ability to the retail sector. Online shops have a market share decides whether one is a winner or loser in the collect and analyze data in order to successfully link of around 10 percent and recorded sales growth technological change. it with online sales. Here, the scarce resource of of just under 10 percent in 2018, while “offline” “personnel” represents a major hurdle. retail stagnated and the number of small retailers continued to decline. IT and statistical skills are becoming increasingly important and data specialists are in high demand. In Unfortunately, the mere conversion of the business order to fully utilize the data potential, the bundling of model to online retailing does not meet customer specialists and responsibilities for data development needs. In fact, the consumer of tomorrow expects is unavoidable. The pioneers in the digitization to be able to freely determine the shopping channel process are the so-called “GAFA companies” with each new purchase in order to create an (Google, Amazon, Facebook and Apple), whose optimal shopping experience across the range of business models and global presence are based possibilities. This is also reflected in the fact that on technology affinity, innovative capability and an companies operating both online and stationary awareness of the potential of data. Against this back- shops have a significantly higher turnover than ground, the partly exaggerated stock market prices pure players, regardless of whether they are online of these companies with their platform models also or stationary. However, this success requires an The optimized linking of distribution channels will become comprehensible – with their future-oriented extended business model, the omnichannel concept, represent the greatest technical and organizational business models, they also detach themselves from which combines the best of both worlds. Customers challenge for retailers in the coming years. At the traditional evaluation criteria. can find out what they want to buy before they visit same time, it offers enormous growth potential the store (and vice versa), inform themselves about by creating a demand-oriented and cost-optimized Therefore, the influence as well as the sustainability the product in the store by smartphone, buy it in the integration of both channels. ”Data” plays a key role of the success of disruptive approaches are store and then have it delivered to their homes. Every in this – as online retailers recognized years ago. In more difficult to predict than traditional market second operator of the 1,000 largest online shops e-commerce, the evaluation and implementation of developments based on evolution and trends. already has at least one additional stationary store. data in category management and push marketing This leads to a decoupling of economic and sector Of those operators, the number of distributers using has become a key competence, while “offline” development and to new approaches in the planning a cross- and omnichannel approach grew significantly and evaluation of such companies. 1 EHI Retail Institute together with Statista as part of the “E-Commerce Market

compared to the previous year (+13.9 percent), while in Germany” study 2018 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.6 Other Risk Premiums

As a rule, future developments and therefore Other risk premiums 2017 / 2018 versus 2018 / 2019 no cash flow in the financial forecast can be 28 Total (in percent, multiple choice possible) precisely predicted. Consequently, it is even 60 more important to identify the uncertainty of 50 56.6 the cash flows and the associated risk and 53.2 reflect them in their expected value as well as 40 in the cost of capital. 30 31.0 32.2 Alongside the option of risk-adjusting 20 discounts from the cash flow, specific risk 10 15.7 premiums as part of the cost of capital’s 13.5 10.7 3.7 1.5 1.1 8.3 8.6 3.2 1.9 2.8 determination might also be taken into 0 0.4 0.8 7.1 account using the risk mark-up method. Country risk Flat rate Implicit with Small size Risk Risk Risk Other No additional premium premium the increase of company premium premium for premium risk premiums In line with the previous year’s findings, on the cost the market premium for planning insolvency for financial of capital risk premium uncertainties risks risks the country risk premium is still the most important surcharge on the cost of capital and 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 thus the most frequently applied other risk premium at both the overall and national level. Selected other risk premiums 2018 / 2019 29 Germany vs Austria vs Switzerland (in percent, multiple choice possible)

80 77.8

55.3

40 47.1 34.0 32.4 20 26.5 18.5 4.9 11.8 8.7 3.7 0 0.0 Country risk premium Small size company premium Risk premium for planning No additional risk uncertainties premiums

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.7 Cost of Debt and Debt Ratio

The second major constituent – apart from the Average cost of debt cost of equity – within the WACC derivation is 30 Total (in percent) the cost of debt and the debt ratio. 7.0

6.0 While the first component describes the 6.4 5.8 6.0 5.0 5.6 expected rate of return of an entity’s debt 5.2 5.4 lender, the second is defined as the ratio of 4.0 4.4 4.6 market value of the (net) debt to market value 3.0 of the total capital (entity value). 3.4 3.4 3.1 2.9 2.0 2.8

After an observed downward trend and a 1.0 historic low in the previous year, the cost of 0 debt applied has slightly increased again. 2006 / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2017 / 2018 / 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: KPMG in Germany, 2019

Average cost of debt 31 Germany / Austria versus Switzerland (in percent)

6.0 6.0 5.0 5.6 5.6 5.7

4.6 4.7 4.0 4.4 4.2 4.3 4.1 3.7 3.0 3.4 3.4 3.5 3.0 3.0 2.9 2.8 2.9 2.8 2.0

1.0

0 2009 / 2010/ 2011 / 2012 / 2013 / 2014 / 2015 / 2016/ 2017 / 2018 / 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists The majority of the industry segments Average cost of debt by industry Average debt ratio by industry reported higher or almost constant cost 32 (in percent) 33 (in percent) of debt, with the largest increment of 2.9 16.3 Automotive Automotive 0.9 percentage points in the Media & 2.6 20.2 Telecommunications sector. 2.7 20.6 Chemicals & Pharmaceuticals Chemicals & Pharmaceuticals 2.5 20.0 In contrast to the trend towards an alignment 2.6 23.7 Consumer Markets Consumer Markets of the cost of debt across industry segments, 2.6 18.6 the average debt ratio continues to differ 2.6 38.1 significantly across industries as well as on Energy & Natural Resources Energy & Natural Resources 2.7 39.9 total average. n / a n / m Financial Services Financial Services n / a n / m 3.0 17.3 Health Care Health Care 2.8 11.8 2.8 23.1 Industrial Manufacturing Industrial Manufacturing 3.2 27.9 3.4 25.0 Media & Telecommunications Media & Telecommunications 2.5 19.9 2.4 36.9 Real Estate Real Estate 1.9 36.3 2.6 12.6 Technology Technology 2.8 10.3 3.3 31.3 Transport & Leisure Transport & Leisure 3.1 27.9

2.9 25.7

Total Total 2.8 23.5

Family-owned companies 2.8 Family-owned companies 25.4 Non-family-owned companies 3.0 Non-family-owned companies 25.7

1 2 3 4 10 20 30 40

2018 / 2019 2018 / 2019

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Chemical Industry and the Challenge of Climate Change

The chemical industry is facing strategic and of greenhouse gases and other environmental for agricultural processes or 3D printing) can be structural challenges worldwide, the increasing pollutants as well as the use of plastic packaging or developed. importance of which is overshadowing pesticides will be limited. macroeconomic cycles. In addition to geopolitical Despite the expected, partly disruptive changes in and macroeconomic trends, such as a growing Not least on the capital markets, investors have the chemical industry and the associated challenges world population combined with a shortage of long since incorporated the criteria of sustainability in the coming years, a complete decoupling of the skilled workers in the industrialized countries, rising and environmental protection into their investment industry from economic cycles in this industry is public debt, expansive interest rate policies and decisions, as violations of environmental standards not to be expected. As an important supplier, the increasing protectionism, the future environment can lead to massive fines, damage to their image chemical industry will continue to be shaped by of the chemical industry will be determined and ultimately decreases in stock prices. The economic developments worldwide and demand in above all by issues such as climate change and independent verification of greenhouse gas key sales regions. However, the long-term success environmental protection, resource consumption emissions and energy management systems or of each individual company in the industry will and sustainability. certification for compliance with ISO 50001 are depend decisively on its own ability to recognize exemplary measures to meet the transparency these changes at an early stage, to simulate and Resources such as fossil and mineral reserves as requirements of investors. evaluate various scenarios with the help, for well as energy are not infinitely available. Global example, of the CEDA simulation and control population and economic growth - especially in In view of the conflicting priorities of scarce model developed by KPMG, and to take suitable emerging markets - combined with increasing trade resources, increasing competition and growing value-creating measures. As the record summer of conflicts and political risks in source countries are regulatory requirements, the chemical industry 2018 with the accompanying drought, the limited exerting pressure on the procurement markets of needs to make fundamental innovations both in navigability of rivers and the interruption of supply the chemical industry. As a result, raw material its own production processes and in its product chains has shown, the effects of disruptive changes prices, profit margins and corporate values can portfolio. Rising input prices and additional efforts can already be felt today. fluctuate sharply in some cases, making appropriate to meet stricter environmental standards can hedging measures indispensable. only partially be passed on to customers, so that innovation-driven efficiency gains within the Above all, however, the issues of climate change framework of resource-conserving production and environmental protection are increasingly are indispensable for securing the company’s becoming the focus of public debate, as own profitability. Advancing digitization will have demonstrated by the results of the recent elections an additional impact on the process technologies in many European countries, the case law on driving and value chain of the chemical industry and its bans or media-effective demonstration movements, customers and suppliers. Through the collection being some examples. Politicians increasingly and intensive use of in-house data, operational see themselves called upon to act – even beyond processes and operating models (e.g. determination the borders of Europe. Despite diverging political of efficient economic and ecological production ambitions in the various regions of the world, routes through machine learning) can be improved environmental standards will be tightened in and new business models (e.g. real-time analysis

almost all countries in the future and emissions © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 3.8 Sustainable Growth Rate

The sustainable growth rate plays an Measurement of the sustainable growth rate important role regarding the determination of 34 Total (in percent, multiple choice possible) the terminal value. The terminal growth rate 40 reflects the company-specific inflationary 36 30 growth in a sustainable state. 32 27 20 24 In practice, the company-specific growth rate 22 cannot be easily estimated. 19 19 19 16 10 15 14 15 13 13 12 The company-specific sustainable growth rate should be derived by analyzing the company- 0 specific operating activities. However, the Past growth Growth rate of Growth rate Growth rate General Company-specific Other most common way among the study’s of company product / product of industry of gross (consumer- inflation rate earnings group sales sales domestic product oriented) participants to estimate the sustainable inflation rate growth rate remains the application of a 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 consumer-based inflation rate.

On the assumption of infinite business models, the sustainable year or so-called Determination of the terminal value 35 Total (in percent) terminal value is primarily decisive for the value of an enterprise. 50 53 50 40 The terminal value requires the company to 30 be in an equilibrium-sustainable state. Such a 35 33 state is typically not achieved at the end of 20 the planning horizon. On the grounds of its 10 9 significant relevance, the determination of the 0 8 5 7 sustainable year should be based on a scenario Last planning year Last planning year Average of the Other approach using simulations such as Monte- (unadjusted, if and top-down planning years Carlo simulations. applicable application adjustment (and past, if necessary) of sustainable growth rate)

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists In general, the average sustainable growth Average sustainable growth rate by industry rate applied by the participants is almost 36 (in percent) Financial Services on the same level as in the previous year. 1.0 Automotive As in the previous year, the However, the range of fluctuation between the 0.8 sustainable growth rate differs industries is slightly higher. 1.1 within the Financial Services Chemicals & Pharmaceuticals 1.0 sector. Participating companies Compared to the previous year, the average 1.3 in the Banking sub-sector applied sustainable growth rate remained stable in Consumer Markets 1.6 a significantly higher sustainable Germany and Switzerland with 1.1 percent and growth rate (1.5 percent) than 0.9 1.5 percent, respectively, while it decreased Energy & Natural Resources companies in the Insurance 1.0 slightly from 1.1 percent to 1.0 percent in sub-sector (0.8 percent). 1.3 Austria. Financial Services 1.3 1.3 When interpreting the applied growth rate, Health Care Media & Telecommunications 1.3 it is also necessary to consider the length of The gap within the Media & 1.2 the specific detailed planning horizon and the Industrial Manufacturing Telecommunications sector 1.0 growth rate applied there. decreased compared to the 1.2 Media & Telecommunications previous year. While the 1.2 sustainable growth rate in the 0.6 Media sub-sector decreased Real Estate n/a from 1.3 percent to 1.0 percent, 1.6 it increased significantly from Technology 1.4 0.7 percent to 1.4 percent in the Telecommunications sub-sector. 1.2 Transport & Leisure 0.9

1.1

Total 1.2

Family-owned companies 1.1 Non-family-owned companies 1.1

0.3 0.6 0.9 1.2 1.5 1.8

2018 / 2019

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 4 Relevance of Value and Enhancement of Value

4.1 Criteria for Investment Decisions

4.2 Monitoring the Enhancement of Value

4.3 Cost of Capital in Capital Market Communication © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 4.1 Criteria for Investment Decisions

Investment decisions have to be evaluated Criteria in investment decisions transparently and consistently in order to 37 Total (in percent) ensure optimal development of the firm’s Primarily value-based objectives (EVA, ROCE) portfolio. 9 1 Primarily strategic objectives 5 Primarily qualitative strategic objectives (for instance, regional coverage) The objectives must be stipulated in 20 14 Primarily quantitative strategic objectives the framework of investment decisions. (for instance, sales or margin targets) Qualitative and quantitative strategic Investment decisions are typically oriented on 71 objectives equally strategic or value-based objectives. Strategic and value-based objectives equally

Investment decisions are, as a rule, long- term by nature. In times of macroeconomic Source: KPMG in Germany, 2019 uncertainties and microeconomic changes Criteria in investment decisions by industry from disruptive business models, companies 38 (in percent) are constantly faced with new challenges to properly consider the valuation-relevant Automotive 12 26 62 risks in the assessment of investment Chemicals & Pharmaceuticals 12 15 73 decisions. Furthermore, the continuing low interest rates, associated with favorable or Consumer Markets 7 29 64 readily accessible financing opportunities, Energy & Natural Resources 15 5 80 may result in an underestimation of the risks that are associated with the target returns of Financial Services 6 23 71 investments and not reflect them completely Health Care 6 13 81 in the decision-making process. Industrial Manufacturing 3 25 72

Media & Telecommunications 4 23 73

Real Estate

19 81

Technology 29 71

Transport & Leisure 13 13 74

0 10 20 30 40 50 60 70 80 90 100

Primarily value-based objectives (EVA, ROCE) Strategic and value-based objectives equally

Primarily strategic objectives Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Finding the Balance in Industry 4.0 (1 / 2)

The industrial revolution to industry 4.0 is Digitization also has an impact on market and with alternative business ideas, on the other hand, leading to changes on an unprecedented scale; competitive conditions in the industrial sector and increase the risk of a possible overvaluation. companies and entire industries are having further increases market uncertainty. Start-ups to make fundamental changes completely have the great advantage of being able to act faster In (established) companies, decision-makers also independently of economic developments. The and position themselves on the markets with frequently encounter silo thinking, which has to be challenge for industrial companies is to integrate new ideas, which is also reflected in the tendency broken up by actively involving employees in the disruptive digitization into the existing production towards high market capitalization for digital new technologies and processes. In particular, the process through the use of new technologies and companies. This is benefited by shrinking market young generation of employees is open to digital developments such as the Internet of Things, entry barriers, which in turn places considerable approaches and the use of artificial intelligence. artificial intelligence and mixed reality and to pressure on established global players to take New communication styles contribute to success in adapt the corporate culture correspondingly. It is action. New developments by start-ups are already implementation and penetration within the company. essential for every industrial enterprise to deal with being used successfully by industrial customers. the opportunities and possibilities of industry 4.0 and to initiate change. New processes, a changed Against this background, it is particularly important workplace culture and a closer involvement of for established companies to keep a close eye customers can aid this. on developments on the market and among competitors, to keep an eye on the start-up scene Shareholders and stakeholders demand a clear and to actively seek opportunities for cooperation. vision from the companies and the description The top managers of large companies want to of concrete opportunities for implementation. acquire specialized digital companies, especially Torn between the stresses of uncertainty and in order to accelerate the change to a digitized external expectations, it is essential for industrial company.1 The willingness and necessity of making companies affected by change to define a acquisitions, on the one hand, and due to the lack transformation process and to break it down into of comparability with established business models, measurable steps that can also be communicated the often highly uncertain valuation of companies to the outside world.

1 KPMG in Germany, Global CEO Outlook 2019, Executive Summary (https:// hub.kpmg.de/ceo-outlook-2019-executive-summary?utm_campaign=CEO%20 Outlook%202019&utm_source=AEM-executive%20summary) © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Finding the Balance in Industry 4.0 (2 / 2)

The opportunities proffered by digitization can recommendations for new systems of analysis) Our experience shows that when defining the only be realized through the targeted use of new and in the customer data (360-degree view of the digitization strategy, companies do not have to focus game-changing technologies. Together with the customer offers the possibility of increasing sales primarily on the technological implementation but Internet of Things, they generate an immense com- through tailor-made, optimized offers). In addition much more on their vision in order to be and remain petitive advantage. For example, the networking to internal process improvements, the potential to successful in the long term. In addition, companies of machines and further development on the create additional added value from existing data with the greatest resilience will cope best with basis of real-time data will become increasingly or to create new products and services with the the upcoming changes. Digitization should not be possible in the future. Extended data analysis help of available data remains largely untapped. seen as another traditional IT project or as a cost- possibilities create transparency in the company For example, production data provides machine cutting program. Ultimately, regardless of economic and can optimize internal processes, e.g. in the manufacturers with valuable indications of how they developments, the biggest winners in a given production processes (early replacement of spare can improve their products, or customers benefit industry will be those companies that have a vison parts prevents unnecessary downtimes), in the from information collected during the manufacture for digitization to develop industrial products and planning system (retrospective planning on the basis of the products.2 services with added value for their customers. of “old” data is replaced by real-time analyses and 39 A performance-led approach3

Most common approach we see ... The leading companies reversed the sequence

Explore Explore Identify Determine Determine Identify alternatives alternatives enabling sources of sources of enabling to capture to capture technologies value value technologies the value the value

... resulting in a technology based approach ... resulting in a value based approach

Illustrative functional-bases approach ... rather than a cross-functional approach

Define Plan Procure Make Distribute Support Define Plan Procure Make Distribute Support Technology application A

Technology Technology Technology Technology Technology Technology Technology application B application application application application application application A B C D E F Technology application C

Technology application D

2 KPMG in Germany, Whitepaper: “Geschäftsmodelle im digitalen Wandel – 3 KPMG in Germany, Study 2018 “A reality check for today’s C-suite on Industry 4.0 – Den Rohstoff Daten richtig nutzen“ https://home.kpmg/de/de/home/themen/2018/10/ The time for experimentation is ending” geschaeftsmodelle-im-digitalen-wandel.html © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 4.2 Monitoring the Enhancement of Value

After an investment decision is taken and the Relevance of monitoring value enhancement Monitoring of value enhancement investment made, it is necessary to continually 40 Total (in percent) 41 Total (in percent) monitor the enhancement in value in the 100 100 specific business. The aim should then be to 80 80 react to changing market conditions quickly 84 and strategically in order to prevent future 79 value losses. 60 60 60

40 40 52 In the course of value enhancement, 46 39 the company’s post-investment risk and 20 20 performance patterns must always be 21 16 2 monitored as central factors in a consistent 0 0 1 way to improve the decision-making process. Important Not important Change of Change of risk Both performance The majority of responses show that the 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 2017 / 2018 2018 / 2019 Source: KPMG in Germany, 2019 necessity of monitoring becomes more important in the light of the increasing future uncertainty. Nevertheless, the change in performance continues to be the primary focus within the value enhancement, which might still result in biased decisions due to additional risk potential.

Most of the participating companies focused on simplified key performance indicators (KPI) as, for instance, sales, EBITDA, EBIT or ROCE. Concerning key risk indicators (KRI), however the surveyed companies frequently focused only on the change of the general market risks such as they are reflected in the market risk premium. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 4.3 Cost of Capital in Capital Market Communication

Regulatory frameworks require companies to Communication and use of the cost of capital immediately disclose non-public information 42 Total (in percent) affecting the stock price. However, the cost of 100 capital is often disregarded in the context of capital market communication. 80

Transparently communicated cost of capital 60 69 67 can help shareholders to better quantify the risks they have taken and to identify changes 40 in the risk structure of their investment. 20 7 7 14 16 Overall, the indicated communication 0 10 10 behavior to the capital market of this study’s Cost of capital plays We use cost of capital Other Cost of capital does not participants does not differ materially from the a major role. It is the and company values from play a role. It is used previous year. benchmark and steering steering concepts such exclusively for accounting parameter and is regularly as EVA for capital market purposes and the discussed with investors communication. associated reporting. and analysts.

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 5 Online Industry Analyses © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists In addition to the findings in the present study, Instructions for KPMG Cost of Capital Study 2019 interactive we provide all the industry-specific figures for 43 cost of capital parameters on our website. ANALYZED PARAMETER 1 specifies the parameter analyzed on this page At https://hub.kpmg.de/cost-of-capital- study-2019 you will find both the forecasting KPMG Cost of Capital Study 2019 Risk-free Rate as well as the cost of capital parameters from PARAMETER TOTAL FILTER DAX-30 shows the development 2 5 shows the development of the the current study and the results of the Cost of the parameter based After an increase in the previous year, the parameter exclusively on the on all participants average risk-free rate slightly declined and basis of the participants in the of Capital Studies from previous years in remained at its third-lowest level since the study has been published. DAX-30 index from Germany readily viewable graphs. There you have the DA X-30 FILTER FAMILY-OWNED 3.9% Family -owned 4.0% opportunity to apply your own search criteria 3.3% Not-fami ly-owned 6 COMPANIES 3.1% 2.6% D 2.3% shows the development of the to display the industry and/or country-specific 2.0% 1.8% 1.5% parameter exclusively on the 1.3% 1.2% 0.9% AT basis of the participants, who parameters that are relevant for you and to CH 0.0% have classified themselves as PARAMETER FILTERED 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2016/ 2017/ 2018/ select their development over time. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 family-owned companies or non- shows the development of 3 family-owned companies the parameter based on the selected filter(s) FILTER BY COUNTRY Beyond that, you can also increase the 7 shows the development of the Individualized analysis Risk-free Rate AUTOMOTIVE CHEMICALS CHEMICALS & PHARMACEUTICALS PHARMACEUTICALS parameter exclusively on the degree of detail for the industry assessments. CONSUMER MARKETS CONSUMER MARKETS 3.9% basis of the participants from the 4.0% ENERGY & NATURAL RESOURCES RETAIL 3.3% selected country Interested readers have the opportunity to 3.1% FINANCIAL SERVICES BANKING 2.6% 2.3% HEALTH CARE INSURANCE 2.0% 1.8% INDUSTRIAL MANUFACTURING 1.5% select sub-sector assessments. 1.3% 1.2% MEDIA FILTER BY INDUSTRY 0.9% MEDIA & TELECOMMUNICATIONS TELECOMMUNICATIONS 8 GENERAL INFORMATION ON REAL ESTATE shows the development of the 0.0% TECHNOLOGY 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2016/ 2017/ 2018/ FILTERS 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2016/ 2017/ 2018/ parameter exclusively on the TRANSPORT & LEISURE 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1. Only one selection is possible per n= 122 106 122 112 122 175 187 161 209 basis of the selected industry As in the previous year, we have performed filter separate assessments of sectors/sub-sectors 2. (country, industry, family-owned) NUMBER OF ANSWERS 3. Filters may be combined 4 indicates the number of answers for which we had responses from at least five 4. (e. g. Germany + Automotive on which the calculation of the sector) average is based participants. 5. A separate evaluation only takes place, if at least 5 answers were submitted

Source: KPMG in Germany, 2019 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists List of Abbreviations

ATX Austrian Traded Index IFRS International Financial Reporting Standards

CAPM Capital Asset Pricing Model KFS/BW “Fachsenat für Betriebswirtschaft in Österreich des KSWÖ”: Council of Experts for Business Administration CEDA Corporate Economic Decision Assessment KSW “Kammer der Steuerberater und Wirtschaftsprüfer in Österreich”: CGU Cash Generating Unit Chamber for Tax Advisors and Auditors in Austria

CEO Chief Executive Officer M&A Mergers & Acquisitions

DAX Main German Stock Exchange MDAX German Mid Caps Stock Index

DAX-30 The 30 largest blue chips on the main German Stock Exchange n / a Not available

Debt Ratio Ratio of Market Value of (Net) Debt to Market Value of n / m Not meaningful Total Capital (Entity Value) P&L Profit & Loss Statement EBIT Earnings Before Interest and Taxes ROCE Return on Capital Employed EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization S&P Standard & Poor’s EVA Economic Value Added SDAX Small Caps, the companies following the MDAX with market FamDAX DAXplus Family 30 Index, consists of the 30 largest and most capitalization and exchange turnover liquid family-owned businesses in the Prime Standard of the German Stock Exchange SFAS Statement of Financial Accounting Standards

FAUB “Fachausschuss für Unternehmensbewertung und Betriebs- SMI Swiss Market Index wirtschaft des IDW”: Technical Committee for Business Valuation and Economics of the IDW TecDAX Stock Index including the Performance of the 30 largest German Companies from the Technology Sector IAS International Accounting Standards US-GAAP United States Generally Accepted Accounting Principles ICT Information, communications & technology WACC Weighted Average Cost of Capital IDW “Institut der Wirtschaftsprüfer in Deutschland e. V.”:

Institute of Public Auditors in Germany, Incorporated Association © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Your Industry Specialists

Contacts KPMG in Germany Automotive Building & Construction Chemicals & Pharmaceuticals Dr. Marc Castedello Michael Hahn Health Care Partner Director Patrick Klingshirn Head of Valuation Germany T +49 711 9060-41163 Director T +49 89 9282-1145 [email protected] T +49 89 9282-4594 [email protected] [email protected]

Asset Management Financial Services Technology Private Equity Gudrun Hoppenburg Telecommunications Ralf Beunker Director Dr. Gunner Langer Partner T +49 69 9587-2640 Director T +49 69 9587-3733 [email protected] T +49 69 9587-2830 [email protected] [email protected]

Consumer Markets Energy & Natural Resources Real Estate Retail Michael Killisch Gunther Liermann Karen Ferdinand Director Partner Partner T +49 211 475-6325 T +49 69 9587-4023 T +49 69 9587-6500 [email protected] [email protected] [email protected] Retail Chemicals & Pharmaceuticals Real Estate Consumer Markets Health Care Andreas Lohner Stephan Fetsch Christian Klingbeil Director Partner Partner T +49 89 9282-4926 T +49 221 2073-5534 T +49 89 9282-1284 [email protected] [email protected] [email protected] © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Financial Services Financial Services Real Estate Rudolf Maurer Timo Schuck Sven Weberbauer Director Partner Director T +49 89 9282-1348 T +49 69 9587-1699 T +49 211 475-7059 [email protected] [email protected] [email protected]

Energy & Natural Resources Media Industrial Manufacturing Michael Salcher Heike Snellen Ralf Weimer Partner Director Director T +49 89 9282-1239 T +49 211 475-7062 T +49 89 9282-1150 [email protected] [email protected] [email protected]

Consumer Markets Automotive Financial Services Telecommunications Olaf Thein Frieder Zschiesche Stefan Schöniger Partner Partner Partner T +49 89 9282-1579 T +49 711 9060-43797 T +49 40 32015-5690 [email protected] [email protected] [email protected] Industrial Manufacturing Public Sector Dr. Jakob Schröder Building & Infrastructure Partner Transport & Leisure T +49 89 9282-1471 Dr. Andreas Tschöpel [email protected] Partner T +49 30 2068-1488 [email protected] © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Contacts KPMG in Austria Dr. Klaus Mittermair Dr. Jens Kaden Dr. Victor Purtscher Partner Partner Partner Head of Deal Advisory Austria T +43 1 31332-3612 T +43 1 31332-3700 T +43 732 6938-2151 [email protected] [email protected] [email protected]

Contacts KPMG in Switzerland Johannes Post Rolf Langenegger Partner Director Deal Advisory, T +41 58 249-4271 EMA Head of Valuation [email protected] T +41 58 249-3592 [email protected] © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered

Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Contact

Overall responsibility Stefan Schöniger Partner Deal Advisory, Valuation KPMG AG Wirtschaftsprüfungsgesellschaft Ludwig-Erhard-Strasse 11 – 17 20459 Hamburg T +49 40 32015-5690 [email protected]

Technical coordination Dr. Marc Castedello Partner Deal Advisory, Head of Valuation Germany KPMG AG Wirtschaftsprüfungsgesellschaft Ganghoferstrasse 29 80339 Munich T +49 89 9282-1145 [email protected]

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