Cost of Capital Study 2016. Value Measurement

Cost of Capital Study 2016

Value measurement – quo vadis ? Table of Contents

Preface 3 5 Relevance of Value and Enhancement of Value 50 Following upon last year’s Summary of Findings 6 5.1 Criteria for Investment Decisions 53 “Anniversary Edition” of our 5.2 Monitoring the Enhancement of Value 54 Cost of Capital Study, this 1 Introduction 8 5.3 The Role of the Cost of Capital in the year’s 11th edition represents a

Capital Market Communication 55 “record”. With 196 companies 2 Derivation of the Cash Flows 12 (compared with 148 companies 2.1 Preparation of the Financial Forecasts 13 6 Industry Analyses 56 in the previous year), more com- 2.2 Growth Expectations 15 6.1 Automotive 58 panies than ever before partic- 2.3 Determination of the Expected Values 16 6.2 Chemicals & Pharmaceuticals 59 ipated in the study. We would 2.4 Determination of the Sustainable Year 17 6.3 Consumer Markets 60 like to take this opportunity to 6.4 Energy & Natural Resources 61 express our gratitude for your 3 Determination of the Cost of Capital 6.5 Financial Services 62 participation. Parameters 20 6.6 Health Care 63 3.1 WACC Overview 21 6.7 Industrial Manufacturing 64 The high number of participants 3.2 Risk-free Rate 23 6.8 Media & Telecommunications 65 and the positive feedback from 3.3 Market Risk Premium 26 6.9 Real Estate 66 the previous years represent 3.4 Beta Factor 29 6.10 Technology 67 both a success and a challenge 3.5 Cost of Equity 32 6.11 Transport & Leisure 68 for us. We hope that this study 3.6 Other Risk Premiums 36 continues to be a fixed com- 3.7 Cost of Debt and Debt Ratio 38 List of Abbreviations 69 ponent of your practical valua- 3.8 Sustainable Growth Rate 42 tions and our key topics remain Your Industry Specialists 70 especially interesting to you 4 Impairment Test 44 once again this year. 4.1 Trigger and Results 45 4.2 Determination of the Recoverable Amount 47 4.3 Plausibility 48

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. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Preface

Dear readers, Consequently, the focus of our study – along with We hope that this year’s Cost of Capital Study also the value-oriented decision-making process itself – meets your expectations and serves as interesting It is our pleasure to present you with the results of is especially on its presentation in the framework reading. We would gladly discuss the results with the eleventh edition of our Cost of Capital Study. of a transparent capital market communication. you in the framework of a personal appointment and This year we analyze how the continuing dynamics are, of course, available for any questions and com- in the development of the economic environment In view of this, we selected “Value measurement – ments you may wish to offer. and the high level of market volatility are impact- quo vadis?” as the motto for this year’s Cost of ing on corporate decision-making processes – for Capital Study. Based on this motto, this year’s Cost With best regards, instance, in the framework of investment, transac- of Capital Study focuses on the following subjects: tion or transformation decisions – and subsequently on financial forecasts and the cost of capital. –– New methods for value measurement?! –– Big data and business analytics tools Making the right decision or selecting the best –– Risk transparency and risk management course of action is increasingly oriented on the asso- –– Value-based management systems 2.0 ciated changes in performance and risk that are also the cause for subsequent changes in the value of Because the financial effects of decisions must also the company. The basis for the assessment of com- be properly reflected in the accounting, the collec- pany decisions is therefore valuation calculations, tion of the empirical information continues to be ori- Dr. Marc Castedello Stefan Schöniger the core of which is the proper derivation of the bud- ented on the IFRS impairment test, due to the fact Partner Partner geted cash flow as well as the equivalent cost of that the impairment test and its associated valuation Deal Advisory, Valuation Deal Advisory, Valuation capital. is obligatory for all IFRS users. KPMG AG Wirtschafts- KPMG AG Wirtschafts- prüfungsgesellschaft prüfungsgesellschaft In a dynamic and volatile environment, the partic- Along with the study, we would like to invite you to ipating stakeholders are increasingly interested take advantage of the interactive opportunities for in a transparent communication about the future analysis available on our website at impacts of company decisions on the company’s www.kpmg.de/cost-of-capital. performance and the risks for the company as well as in the decision-making process itself. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 3 ’06 ’07 ’08 ’09 ’10 Editions of the Cost of Capital Study by KPMG

–– Comparison of the tar- –– Initial participation of –– Initial participation of –– Initial participation of –– Analysis of industry- Innovations in the get and actual implemen- corporations from corporations from corporations from Spain specific particularities tation of the Impairment Switzerland and Austria Great Britain and the –– Initial querying of the study Test as per IFRS (IAS 36) in addition to Germany Netherlands prognosis of future and US-GAAP (SFAS 142) economic development in German corporations

–– The effects of the –– Focus on prognoses Highlighted subjects financial market crisis on in a difficult market the balance sheet and environment of the study valuation practice © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. ’11 ’12 ’13 ’14 ’15 ’16

Kapitalkostenstudie 2016

Wertmessung – quo vadis ?

–– Initial querying of the –– First extensive industry –– Detailed analyses for –– Study layout in tablet-friendly –– Significant expansion in the transaction behavior and analyses every industry landscape format number of participating intentions of companies –– Possibility of individual analysis companies and data query with an Internet –– Expansion of the Internet-based platform opportunities for analysis

–– Focus on developments –– Focus on managing –– Impact of volatility on –– Consideration of risk in –– Corporate Economic Decision –– New methods for value in volatile markets uncertainty financial forecasts the derivation of cash Assessment measurement?! –– Impact of the continued –– Interaction of risk-free flows –– Consideration of performance –– Big data and business analytics difficult market environ- rate and market risk –– Risk equivalence in and risk drivers tools ment on the practice of premium determining the cost –– Stress testing in times of higher –– Risk transparency and risk valuation, in particular on –– Other risk premiums of capital volatility management the cost of capital –– Sustainable growth rate –– Small cap premium –– Quantification of operative risks –– Value-based management –– Debt beta: Sharing of –– Effects of the low-interest phase systems 2.0 risk between financiers –– Paradigm shift in the determination of the market risk premium –– Value enhancement as a decision-making metric © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 5 Summary of Findings

Derivation of the Cash Flow Cost of Capital Planning uncertainty WACC Beta factors

High volatility and the uncertainty of The weighted average cost of capital (WACC) is, The highest unlevered beta factor was applied in future prospects are part of the daily routine after years of a decreasing trend, at 7.1 percent, the automotive sector with 1.01, the lowest in for planners and valuers. at the same level as the previous year. real estate with 0.42. Dealing with that remains a major challenge in the framework of decision- The highest WACC was observed in the The participants from the energy & natural making processes and company valuations. technology sector with 7.9 percent, the resources sector applied a much lower unlevered lowest in energy & natural resources with beta factor this year. The greatest increase of Growth expectations 6.3 percent. the unlevered beta factor was observed in the transport & leisure sector. Overall, the long-term sales growth Risk-free rate expectations of the study’s participants Cost of debt remain unchanged. The average risk-free rate applied of 1.5 percent Expectations with regard to the future in Germany and Austria and 1.3 percent in Despite the lower risk-free rate, the average cost growth of EBIT are, by contrast, much more Switzerland once again reached an historic low. of debt applied remained unchanged from the reserved. previous year at 3.4 percent due to higher risk Market risk premium premiums (credit spreads). With an average of 6.4 percent in Germany and Austria and 5.7 percent in Switzerland, the market risk premium applied by the participants continued to rise, in Germany and Austria, however, less so than the respective risk-free rates declined. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Impairment Test Values and Value Enhancement Impairment Investment decision Capital market communication

The percentage of companies that recognized Investment decisions were made by the As in the previous year, the majority of the an impairment on goodwill or assets is slightly majority of participants based on both strate- companies did not use the company value and below the level of the previous year. gic as well as value-oriented objectives. its change over time in their capital market communication. Monitoring For the participants, the most important aspect for monitoring the development of value was the change in performance in the previous financial year.

About half of the participating companies considered both the development of the performance as well as the risk for steering and controlling purposes. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 7 1 Introduction

With 196 companies participating in Germany, The survey of the companies occurred between Furthermore, we would like to draw your attention Austria and Switzerland, the participation was sig- March and July 2016. The reporting dates of to our Cost of Capital website. This website was nificantly higher than in previous years (2014/2015: the consolidated financial statements included introduced in our anniversary addition last year and

148 companies). Of the participating companies, in the study were between 31 March 2015 and allows study participants as well as other interested 148 were in Germany, 19 in Austria and 29 in 30 April 2016. parties to obtain an individual and interactive data Switzerland. analysis of the study results. Using your own search Industry analyses criteria, you can generate the data that is relevant for The participation rate of the DAX 30 companies in you and therefore better understand the values and the study was, at 77 percent, even higher than in In the framework of the survey, the participants developments of the cost of capital parameters that the previous year (73 percent). In addition, 46 per- were requested to assign themselves to a sector are relevant for you. cent of the MDAX companies participated in this or sectors in which their company focuses its activ- year’s study (previous year: 34 percent). (Figure 01) ities. A separate analysis was only performed for At www.kpmg.de/cost-of-capital you will also find those industries with a response rate of at least five user-friendly presentations of both the cost of capi- participants. tal parameters from our current study as well as corresponding results from the previous years. As a result of the high number of participants it was possible for us, in contrast to the two previous years, to perform a separate analysis for the real estate industry.

In the industry-specific analyses, we concentrated Participation rates in Germany (in percent) on selected cost of capital parameters. In section 01 6 of the study, we show you the development of these critical parameters over time. In addition, our 80 industry specialists provide insights into current

60 77 developments, trends and an outlook of the developments expected for the individual industries. 40 46 40 20 30 26 0 DAX-30 MDAX TecDA X SDAX FamDAX

Cost of Capital Study 2016 9 New Methods for Value Measurement?!

Our business environment is probably shortly before poor decisions, threatening the very existence of tion practice to the fact that it is not enough for the its greatest upheaval known to date. Increased glo- companies. solution of real issues to move within the strict lim- balization in connection with digitalization, Inter- its of a theoretical (CAPM) model. This is even more net 2.0 and Industry 4.0 are resulting in fundamen- In the following, we will present advanced tools for true if you consider that the real world of the inter- tal changes. Established business models are being decision-making and company steering. First of all, national transaction markets and the ideal world of threatened by disruptive approaches and new tech- we will discuss a practicable, conceptual extension perfect markets only have very limited overlapping nologies. This means that stable expectations, for existing decision-making and valuation methods. areas. In addition, the valuation practice searches reproduced in long-term static financial forecasts Section 2 deals with possibilities for systematically for (subjective) marginal prices in the framework of are a thing of the past. The increased volatility has compiling and processing relevant information by the decision-making process and requires compar- become the new normal – it promises great oppor- means of big data and business analytics tools. Sec- ative marginal prices, while theoretical equilibrium tunities and risks at the same time – confronting tion 3 demonstrates new ways for the transparent models should only explain (fictitious) equilibrium companies and investors with major challenges. determination and assessment of risks in the deci- prices in perfect markets. (Figure 02, page 11) sion-making process. With the results it is possible More than ever, companies are confronted with the to derive practical recommendations for action and In view of this, we consider it to be recommendable task of detecting opportunities and hazards at an impact corporate risks – directly and quantifiably. and necessary for the assessment of company deci- early date so as to be able to react adequately and Company decisions should always be oriented on sions to extend the classical approaches of practical make the right decisions. Investors, too, must take the value effects associated with them. Numerous valuation so that they also cover the numerous sub- the uncertainties of the future into consideration in value-based management systems are, however, jective issues and at the same time – in contrast to their decisions to a greater degree than in the past. no longer appropriate for today’s or the future’s the, to date, purely practice-oriented valuation aids – The dynamically changing market and competitive demands. For that reason, in section 5 we demon- are based on a practicable concept that is both environment permanently pose new requirements – strate what “Value-orientation 2.0” could look like transparent and coherent. Above all, this concept both in the approaches to making decisions them- and how it makes a valuable contribution to the ca- has to satisfy the demand for consistency and a lack selves as well as in the transparency and documen- pital market communication. of ambiguity; by contrast, the claim of being theoret- tation of the decision. Along with the practicability ically perfect need not be achieved. in the implementation and the communicability, the That current valuation methods – based on theoreti- essential demand on decision-making methods in cal models such as the Capital Asset Pricing Model So as not to obtain a string of frequently discon- practice is that, on the one hand, they take all the (CAPM) – only reflect reality to a limited degree is nected single solutions that are relatively opaque relevant information into consideration and, on the well known. An unmodified application of these and therefore consistently elude any form of com- other hand, also sufficiently reduce the complexity models appears questionable in the current and prehension, requires a conceptual framework. This of reality. To that end, valuers and corporate con- future economic environment. Corporate decision- framework should unambiguously include both the sultants have to develop innovative decision-mak- makers do not have, in contrast to theorists, the lux- numerous, real decision-making situations as well ing and valuation concepts. The established meth- ury of having an unlimited amount of time to solve as the various valuation concepts and consistently ods available to date are not suited to meet these their problems. In reality “valuation aids” such as connect these with one another. Such an extended challenges and completely fulfill the expectations the so-called alpha factors, fungibility surcharges or decision-making and valuation framework should placed on them. They may become the source of country risk premiums are responses of the valua- also combine the specific subjective situation of the © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. customer with the actual issues and expectations of With CEDA (Corporate Economic Decision Assess- assumptions of the equilibrium methods to the dri- the individual target groups. It results in the subjec- ment), KPMG provides a practicable decision- vers of the real markets. CEDA defines the concep- tive marginal prices sought in the practice of valua- making and valuation concept. It combines obser- tual framework that attaches the individual price tag tion as the basis for company decisions. The addi- vable, real matters consistently and unambiguously to every option in every decision-making situation. tionally obtained information leads to an improved and can be flexibly adapted to various issues. It suc- capital market communication and transparency. cessively approaches the to date idealized model www.kpmg.de/ceda

Extended concept for solving practical decision-making issues with CEDA “Practice has shown that established valuation

02 methods are increasingly reaching their limits in an ever more rapidly changing world marked by high volatility and disruptive effects. This Real world – Transaction markets Ideal world – CAPM makes it susceptible to potentially making poor decisions, which are caused by the limitations Start-ups Assets/Liabilities Contractual clauses Listed major corporations of the models applied. A practice-oriented Individual companies Joint ventures Venture capital Company shares extension of the conceptual methods for under- SMEs Controlled Private equity companies Portfolios Empiricism Model standing and determining value is possible without having to relinquish the previously Conceptional solution range of the valuation practice (current) established methodological basis.” Current approaches Value = Price Dr. Marc Castedello What is my (subjective) marginal price ? How do I explain the equilibrium price ? Partner, KPMG in Germany = Existing decision-making problem = No decision-making problem

Capital market Decision model Option model Portfolio model model

KPMG decision-making concept CEDA Real world permanently Marginal prices Information Transparency on the way to equilibrium Decision

Cost of Capital Study 2016 11 2 Derivation of the Cash Flows © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 2.1 Preparation of the Financial only 48 percent of those surveyed reported per- In particular in the financial services sector only forming a completely integrated financial forecast. few participants (15 percent) perform a completely Forecasts This means that only about half of the participants integrated financial forecast. The primary reason for derive the valuation-relevant cash flow consistently this is that, due to their specific business models, The financial forecast is of primary importance in from the interaction of the expected values of the the majority of banks and insurance companies do the course of corporate valuations – regardless of profit and loss statement (P&L), balance sheet and not perform balance sheet planning. The items rel- the reason – and represents the basis for a sustain- cash flow statement. By contrast, the percentage evant for the fulfillment of regulatory requirements able and systematic derivation of expected values in of participating companies that performed only a (for instance, the volumes of loans and securities, which all the expected risks and opportunities of the planning of selected balance sheet items along with capital investments, insurance-technical provisions) company to be valuated are completely reflected. the planning of a P&L, increased significantly com- are, however, regularly planned so as to reproduce pared to the previous year (2015/2016: 36 percent; the maintenance of the regulatory equity require- In contrast to the increasing trend in recent years 2014/2015: 23 percent). An unaltered total of 84 per- ments and other parameters in the financial fore- (2013/2014: 41 percent; 2014/2015: 61 percent), the cent of the participants applied an, in our opinion, casts. Along with the planning of the P&L and the number of participants that perform a completely appropriate planning structure for the derivation of risk assets and equity planning, the liquidity and integrated financial forecast decreased. This year the cash flow. (Figure 03) funding planning is, however, also generally performed.

Degree of detail of the financial forecasts 03 Total (in percent)

40 48 30 36 20 10 16 0 Forecast only Forecast of a P&L Completely of a P&L and additionally integrated (P&L, selected balance balance sheet sheet items or a and cash flow) complete balance sheet

Cost of Capital Study 2016 13 The selection of the planning period remains a mat- Planning horizon – yearly comparison ter of some incongruity. A longer planning period 04 Total (in percent, multiple choices possible) means – in particular in view of the observable dynamic market particularities – a greater planning 50 uncertainty, if the planning period is not accompa- 40 nied by additional scenario and simulation analyses. 46 A short planning period, on the other hand, results 40 41 30 37 in investment and product life cycles as well as long-term industry developments not being properly 20 reproduced in the financial forecast, leading to erro- 18 neous results in the valuations and may then result 10 17 in bad decisions. 11 8 2014/2015 0 2015/2016 The regulations of the IAS 36.33 (b) are also to be One budget year Three planning Five planning Another number years years of planning years observed in the case of impairment tests – at least with the application of the value in use concept – Source: KPMG, 2016 whereby the financial forecasts should in principle not exceed a period of five years, unless the company can prove that it is able to estimate the future cash flows over a longer period with sufficient accu- Consideration of sensitivities A little more than half of the participating companies racy. 05 Total (in percent) (55 percent) considered sensitivity analyses in the framework of their planning – mostly (with 35 per- As in the past years, the majority of the companies Cash flow cent) both for the cash flow and for the parameters surveyed continue to apply a planning period of 15 (amongst others, sales, that determine the cash flow as well as for the cost three or five years, whereby there was a slight shift EBITDA, EBIT) of capital. Another 15 percent performed sensitiv- Cost of capital to longer planning periods compared to the previous 5 (including sustainable ity analyses exclusively for the cash flow – amongst year. The average of the planning years for the com- 45 growth rate) others sales, earnings before interest, taxes, depre- panies that selected a different number of planning Both ciation and amortization (EBITDA) as well as earn- years was about eight years. (Figure 04) No ings before interest and taxes (EBIT) – or only for the cost of capital (5 percent, including sustainable 35 growth rate). (Figure 05)

1 2 3 4 5 6

Source: KPMG, 2016 Economic forecast of real growth of the gross domestic product 06 Total (in percent)

4.0 3.7 3.0 3.0 2.0 1.9 1.9 1.9 1.8 1.6 1.7 1.6 1.0 1.4 1.5 1.3 1.3 1.4 1.4 1.4 1.4 1.4 1.4 1.1 0.4 1.0 1.2 0.7 0.3 0.8 0.8 0.9 0 0.6 0.5 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Germany Austria Switzerland Source: KPMG analyses on the basis of data from The Economist Intelligence Unit Limited, 26 July 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 15 Forecasted growth of EBIT by industry 2.3 Determination of Expected “In times of increased uncertainty and volatility, (in percent) 08 Values planning becomes especially important. Scenario-based, multi-value financial forecasts Automotive 9.2 allow companies to systematically compile and It is especially important for companies to continu- Chemicals & Pharmaceuticals 8.6 sufficiently reflect the performance and risk ously improve and expand the quality and flexibility drivers.” Consumer Markets 9.6 of their financial forecasts. While the single-value Energy & Natural Resources n/a estimate of a “normal” financial forecast may be Stefan Schöniger Financial Services n/m sufficient in a stable economic atmosphere, in a vol- Partner, KPMG in Germany Health Care 11.0 atile market environment the performance and risk Industrial Manufacturing 10.1 drivers can only be systematically and transparently compiled with scenario-based multi-value financial Media & Telecommunications 7.3 forecasts. As explained in our following key topic, Real Estate n/a big data and business analytics tools are being Technology 10.7 increasingly applied in the analysis of performance Transport & Leisure n/a and risk drivers. Total 8.8 Measurement of the expected value Consistent with the trend in recent years, the major- Total (in percent) 2 4 6 8 10 12 ity of the study participants once again derived the 09 Source: KPMG, 2016 expected values of the valuation relevant cash flow 1 Single-value estimate as on the basis of a single-value estimate in accor- 8 per the financial forecast dance with the financial forecast (81 percent; pre- Simple scenario (best, vious year: 83 percent). A total of 18 percent of the 10 normal, worst case) participants performed a simple scenario analysis, and equal weighting of thereof 10 percent with an equal weighting of the the scenarios Simple scenario (best, individual scenarios and 8 percent with a weight- normal, worst case) ing in accordance with the specific probability of the and weighting with scenarios. Only about 1 percent considered more varying probabilities of complex scenario analyses in deriving expected val- 81 occurrence ues. (Figure 09) Complex scenario analyses (for instance, by means of Monte- Carlo simulations)

40 48

30 40

10 11 0 7 Last planning year Last planning Average of the Other (unadjusted) year and top-down planning years (and adjustment past, if necessary)

Cost of Capital Study 2016 17 Big Data and Business Analytics Tools

The digitalization of entire areas of life and business therefore to check the plausibility of financial fore- worldwide car production according to cities, it can is creating an immense flood of data and generat- casts. KPMG has therefore been applying business be seen that in evaluating this highly complex data ing innumerable changes, innovations and inven- analytics tools for years both for industry studies as and data structures without data analytical tools, the tions. The key to handling these immense amounts well as for the analyses of financial forecasts in the ability to analyze the data quickly reaches its limits, of data, which are frequently described with the framework of company valuations, impairment tests especially if you add in the dimension of time. With buzzword “big data”, is in intelligently linked and or the evaluation of options so as to accelerate the the aid of the new analytical instruments, the devel- interactive analyses. In the assessment of finan- economic analysis and to better support clients in opments over time can be easily recognized and cial forecasts – amongst other things as the basis making strategic decisions. compared with those of management estimates. for impairment tests – qualitative and quantitative (Figure 11, page 19) analyses of big data are also playing an important To be able to compete internationally in the age of role. In particular, analyses regarding market-based massive data and the associated short life cycles of The analyses can be intelligently combined with developments on the basis of extensive market and information requires innovative, revolutionary and various data sources and integrated into more macro-data form an essential basis for the plausi- even disruptive approaches to sustainably guaran- advanced analyses. They allow for statements to be bility of the financial forecasts for various options. tee the innovative strength and competitiveness of a made about the prospects of various business mod- It is therefore necessary to reflect the market and company. Ever shorter development cycles and dis- els or the planning of an internationalization strat- macro-economic context on the basis of data as ruptive developments within a sector, for instance, egy, for instance, and can be checked for plausibil- extensively as possible. Only with a comprehen- are resulting in the classical methods of planning ity. Furthermore, the results of the analysis allow sive consideration of the relevant drivers, such as analysis, such as analyses of the past or wide-rang- for various future scenarios to be simulated and – in environmental and market factors (e.g. competition, ing analyses of the competition, becoming ever less combination with advanced instruments for deci- purchasing power), can opportunities and risks be important. Here, the use of business analytics tools sion-making and company steering as are described evaluated. allows the evaluation of a multitude of market analy- in other key topics of this study – the development ses and therefore increases the quality of the perfor- of a “quantifiable feeling” for planning risks and With the use of business analytics tools it is pos- mance measurement and aids in the assessment of therefore business risks. sible to efficiently process, structure and visual- risk for material planning assumptions. They can be ize unstructured masses of data from numerous better analyzed and visualized with regard to their The bottom line is that business analytics tools are sources and compile these to valuable insights. financial impacts. already essential instruments for determining the Sophisticated business analytics tools are there- plausibility of financial forecasts and their under- fore taking on an increasingly important place in The automobile industry is also being confronted lying assumptions. Their importance will continue the framework of testing the plausibility of financial with dramatic changes. To survive in the long run, to grow rapidly in the future. They allow the linking forecasts and therefore also with impairment tests. companies in this sector will have to revise their of data sources, the visualization of complex rela- By means of visualization they support the analy- business models and current product and service tionships and aid in the development of key perfor- sis of complex data structures and allow an efficient models in the coming years. Here, too, decisions mance indicators (KPIs). If necessary, they can be use of the increasingly extensive and more rapidly will have to be made on the basis of quality-assured simulated so as to make the risks involved in the available masses of data. This development in turn indicators. For that reason, we have selected an financial forecast more transparent. allows valuers to obtain well-founded insights into analysis from this sector to demonstrate the use of a

market structures in a shorter period of time and data analytics tool. With the example of the current © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. “By using big data analysis tools, we have been Global automobile production Cars and light trucks (under 6 tons) able to not only make our proven and accepted 11 advisory solutions more dynamic, but also to expand the content. This enables us to provide our clients with even greater added value in Annual production volumes by sites: 2015 Top 10: Production sites 2015 the framework of assessing the plausibility of financial forecasts and impairment tests.” # Site 1 Chongqing 2,776,402 Olaf Thein 2 Liuzhou 2,015,415 Partner, KPMG in Germany 3 Ulsan 1,528,831 4 Wuhan 1,425,436

Togliatti 5 Changchun 1,308,171 Ust-Kamenogorsk With the following link and QR code you will find the Urumqi 6 Shanghai 1,301,506 sample analysis. Analyze and filter the dashboard Casablanca 7 Guangzhou 1,198,653 Spring Hill according to your needs! Yanbu 8 Shenyang 1,115,243

9 Shunyi 1,052,001 http://tinyurl.com/KPMGNextGenAuto Aymesa 10 Tianjin 971,261

11 Wolfsburg 815,655

12 Kyushu 794,370 San Jose Port Elizabeth Broadmeadows 13 Nanjing 759,046 14 Manesar 707,649

15 Chengdu 699,404

2015 9% 27% 15% 20% 8% 16% Total 88.56 m

Western Europe North America Japan/Korea India and ASEAN Legend: Eastern Europe South America China Rest of the world 0 2,776,402

Source: KPMG Automotive Institute, LMC, Q1, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 19 3 Determination of the Cost of Capital Parameters © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 3.1 WACC Overview When considering the average WACC applied by all WACC (after corporate taxes) by industry the surveyed companies as well as the WACC of the 13 (in percent) individual sectors, it should be noted that the data Following the continuous downward trend of the stems from companies from different countries, 7.6 weighted average cost of capital observable since partially from different currencies and from varying Automotive 7.9 2009/2010, the WACC remained, at 7.1 percent, at points of time. 7.3 the level of the previous year. The reason for the Chemicals & Pharmaceuticals 6.8 downward trend of the WACC in the past was the In contrast to the almost unchanged overall level of 7.2 decrease in the risk-free rate that was not com- the WACC for all the participating companies, there Consumer Markets pletely compensated for by a corresponding in- is a very different development in the individual sec- 6.7 crease of the market risk premium, which resulted tors compared to the results of the previous year. 6.3 Energy & Natural Resources overall in a decrease in the cost of equity and the While the WACC in media and telecommunica- 6.1 WACC. (Figure 12) tions decreased by 0.8 percentage points to 7.2 per- n/m cent, in the technology and health care industries Financial Services n/m they increased by 1.1 and 1.2 percentage points, 6.9 respectively. (Figure 13) Health Care 5.7 7.6 Industrial Manufacturing WACC (after corporate taxes) 7.4 Total (in percent) 7.2 12 Media & Telecommunications 8.0 10 n/a Real Estate n/a 8 7.9 8.1 8.1 8.2 8.2 Technology 8.0 7.9 7.9 7.7 7.8 6.8 6 7.1 7.1 6.9 Transport & Leisure 4 6.7 7.1 Total 2 7.1

2 4 6 8 0 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2015/2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2014/2015

Source: KPMG, 2016 Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 21 Varying costs of capital on the basis of individual The surveys of the past demonstrated that the com- Deviation of the cost of capital in M&A transactions cash generating units (CGUs) are considered by panies frequently applied various costs of capital and investment decisions 15 Total (in percent) 40 percent of the study participants. Deviations here for differing types of valuations. For that reason, result from different risk factors within the individual we asked the participants the question of whether Higher cost of capital CGUs. The WACC after corporate taxes for the indi- they also applied the cost of capital derived for the 9 for impairment test

vidual GCUs ranged in average between 6.3 percent purposes of the impairment test for other purposes Lower cost of capital for impairment test and 9.0 percent. The ranges reported varied greatly such as the valuation in connection with transac- 38 22 No difference depending on the sector. (Figure 14) tions or fiscal purposes. As in the previous year, Not compared

Source: KPMG, 2016

WACC (after corporate taxes) per CGU by industry Deviation of cost of capital for fiscal valuations (in percent) 14 16 Total (in percent)

Automotive 7.2 9.5 Higher cost of capital 2 Chemicals & Pharmaceuticals 6.5 10.1 2 for impairment test Lower cost of capital Consumer Markets 6.3 9.3 for impairment test Energy & Natural Resources 4.7 8.2 No difference Not compared Financial Services n/m 36 Health Care 6.1 7.5 60 Industrial Manufacturing 6.6 9.3 Media & Telecommunications 6.3 10.5 Real Estate n/a Source: KPMG, 2016 Technology 7.2 10.0 Transport & Leisure 6.1 9.6 Total 6.3 9.0

6 8 10 12

A reconciliation with the costs of capital for fiscal year. Analogous to the development of the returns points to 1.5 percent, while the risk-free rate of the valuations was only performed by 40 percent of the on government bonds from Germany, Austria and participating companies in Switzerland remained companies (previous year: 45 percent). (Figures 15 Switzerland, the risk-free rate used by the study par- almost on the level of the previous year with a and 16, page 22) ticipants in the study period also dropped to an his- decrease of only 0.1 percentage points. There- torical low of 1.5 percent. (Figure 17) fore, the difference in the interest rates for the two currency zones continued to decrease and now “In principle there should not be a deviation In appraising the average risk-free rate applied by all amounts to 0.2 percentage points. (Figures 18 between the costs of capital for the varying the surveyed companies, it must also be considered and 19, page 24) valuation purposes, due to the fact that the that the company data here stems from different costs of capital should at least be based on consistent concepts and there should only – if at all – be isolated cases of cause-related deviations in the parameters.”

Dr. Andreas Tschöpel Average risk-free rate applied Total (in percent) Partner, KPMG in Germany 17

5 4.9 4 4.4 4.3 4.3 3.9 3 3.3 3.1 2 2.6 2.3 1.8 1 1.5

0 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Cost of Capital Study 2016 23 Yield curve “Switzerland and the Swiss companies mir- European Central Bank versus Swiss Nationalbank (in percent) 18 rored the development of the global trend with a decreasing risk-free rate. The coming 5.0 EUR risk-free rate on the months will certainly be interesting now that 4.5 basis of the European the 30-year Swiss bonds also slipped below

4.0 Central Bank yield curve (AAA sample, three- zero for the first time in June 2016. This means 3.5 month average) that both financial theorists and practitioners 3.0 EUR risk-free rate as are being confronted with new challenges. Is 2.5 per the annual Cost of a negative risk-free rate appropriate? What 2.0 Capital Study should the market risk premium be – constant 1.5 CHF risk-free rate on the basis of the Swiss or higher? Is it possible that company valua- 1.0 Nationalbank yield curve tions increase in a negative interest environ- 0.5 (three-month average) ment? How do you factor in short-term defla- 0 CHF risk-free rate as tion and long-term threatening inflation in 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 per the annual Cost of corporate planning?” Capital Study Source: KPMG analyses on the basis of data from the European Central Bank and Swiss Nationalbank Johannes Post Partner, KPMG in Switzerland Average risk-free rate applied Germany / Austria versus Switzerland (in percent) 19 When analyzing the risk-free rates applied, the dif-

3.5 ferent maturities of the government bonds/yield 3.5 curves used also have to be considered. In view of 3.0 3.4 the, generally, existing premises of the going con- cern and the resultant infinite timeframe of a cor- 2.5 2.7 2.7 2.5 porate valuation, a longest-term interest rate is 2.0 preferred to guarantee the term equivalence and 1.5 1.8 1.9 1.9 therefore the application of long-term yield curves. 1.5 1.0 1.4 1.2 1.3 0.5

0 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016

Germany/Austria Switzerland

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: KPMG analyses on the basis of data from the European Central Bank and Swiss Nationalbank © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 25 3.3 Market Risk Premium Average market risk premium 23 Total (in percent)

The market risk premium describes returns de- 7 manded by an investor above the risk-free rate for 6 holding a market portfolio containing risky securi- 6.1 6.3 ties. It should be noted that the market risk premium 5 5.8 5.8 5.0 5.0 5.1 5.1 5.1 5.2 is not a parameter that is directly observable in the 4 4.7 capital market, but rather – in accordance with the Capital Asset Pricing Model CAPM that is predom- 3 inant in practice – only represents the difference 2 between the empirically observable parameters 1 market return and risk-free rate. 0 The average market risk premium applied in the pe- 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ riod from 2007/2008 to 2011/2012 ranged between 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

5.0 percent and 5.2 percent. As a result of the eco- Source: KPMG, 2016 nomic and financial crisis, it increased in 2012/2013 Change in expected returns in Germany significantly by 0.6 percentage points to 5.8 per- (in percent) cent and in the last year by another 0.3 percentage 24 points to 6.1 percent. This year, too, there was an 10 10 increase of the average market risk premium applied 9 9 of 0.2 percentage points to 6.3 percent. (Figure 23) 8 8 7 7 In this connection the Technical Committee for Busi- 6 6 ness Valuation and Economics (Fachausschusses 5 5 für Unternehmensbewertung – FAUB) of the Insti- 4 4 tute of Public Auditors in Germany (Institut der Wirt- 3 3 schaftsprüfer – IDW) published the “Comments rate Risk-free 2 2 of the FAUB regarding the consideration of the finan- 1 1 cial market crisis for the determination of the dis- Yields and market risk premium 0 0 count rate in the valuation of companies” on 19 Sep- tember 2012. In the framework of this publication, the committee recommended applying a market risk 11.2014 11.2015 07.2014 07.2015 07.2016 01.2014 12.2014 01.2015 12.2015 12.2013 01.2016 10.2014 10.2015 02.2014 02.2015 02.2016 09.2014 09.2015 05.2014 03.2014 05.2015 03.2015 04.2014 04.2015 08.2014 06.2014 08.2015 06.2015 05.2016 03.2016 04.2016 06.2016 premium before personal taxes of between 5.5 per- Implicit returns Market risk premium

cent and 7.0 percent. FAUB range Risk-free rate Source: KPMG-Analyse auf Basis von Daten von S& P Capital IQ © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. In view of this, as well as the continuing downward Due to the fact that the market risk premium is a Average market risk premium by industry trend of the risk-free rate, the participants, assum- sector-independent parameter, there should not 26 (in percent) ing the relevant overall returns, considered once be any material differences between the individual again a subsequent increase of the market risk pre- sectors. The average market risk premium applied 6.5 mium that would at least partially compensate the by the participants ranged within a narrow corridor Automotive 6.4 decrease in the risk-free rate. This development between 6.1 and 6.5 percent across the sectors. As 6.3 also coincides with the implicit returns observed for in the previous year, the participating companies Chemicals & Pharmaceuticals 6.2 listed corporations in Germany. (Figure 24, page 26) in the field of financial services applied the lowest 6.4 premium with 6.1 percent, while the highest mar- Consumer Markets The average market risk premium applied by the Ger- ket risk premium of 6.5 percent was applied in the 6.2 man study participants of 6.4 percent in 2015/2016 sectors automotive and media & telecommunica- 6.3 Energy & Natural Resources was above the mean of the range recommended by tions. (Figure 26) 6.1 the FAUB. (Figure 25) 6.1 Financial Services 5.6 6.4 Health Care 6.0 6.4 Average market risk premium Industrial Manufacturing Germany versus Austria versus Switzerland (in percent) 6.1 25 6.5 Media & Telecommunications 7 6.3 6.2 6 6.4 6.4 6.4 Real Estate n/a 6.0 6.0 6.0 6.0 6.3 5 5.5 5.7 6.4 5.4 5.2 5.1 5.3 5.3 Technology 4 5.0 5.0 5.0 5.0 6.5

3 6.2 Transport & Leisure 6.0 2 6.3 Total 1 6.1 n/a n/a 0 2 4 6 8 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2015/2016 Germany Austria Switzerland Source: KPMG, 2016 2014/2015

Cost of Capital Study 2016 27 In the analysis of the individual companies, it was “In Switzerland, the average market risk pre- once again demonstrated that the majority (74 per- mium applied was significantly below the pre- cent) of the German study participants applied a mium applied in Germany and Austria while market risk premium between 6.0 and 7.0 percent. the risk-free rate was at a comparable level. All Only 1 percent each of the German study partici- things being equal, this would only be plausi- pants applied a market risk premium of below ble if the total return demanded by investors in 5.0 percent or above 7.5 percent in determining Switzerland was lower than in Germany and their costs of capital. (Figure 27) Austria and they had correspondingly lower risk expectations for Switzerland.” Dr. Marc Castedello Partner, KPMG in Germany

Distribution of the market risk premiums of German companies 27 (in percent)

35 39

30 35

10 10 5 1 8 1 0 5 Below 5.0 to 5.5 to 6.0 to 6.5 to 7.0 to Above 5.0 percent 5.5 percent 6.0 percent 6.5 percent 7.0 percent 7.5 percent 7.5 percent

Value in use

Fair value less costs of disposal Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 29 Unlevered beta factors year. Within the energy & natural resources sec- The highest average unlevered beta factor was in tor, the average unlevered beta factor decreased by companies in the automotive industry (1.01), the In determining the cost of capital, the systematic 0.18 to 0.76 and is therefore at its long-term histori- lowest average beta factor was in real estate (0.42). operative risk is reproduced by means of the un- cal average. This could be a sign that the study par- The reason for the low fluctuation in the real estate levered beta factor. The average unlevered beta fac- ticipants consider the uncertainties and challenging industry is to be found in the earnings that are less

tor applied remained almost unchanged at 0.85 in market conditions in the sector to be lower than in subject to economic cycles, for instance, due to the last two years. (Figure 29) previous years. The strongest increase, by contrast, long-term leases and the basic need for housing. was observed in the transport & leisure industry. Despite the constant development of the overall Here, the unlevered beta factor increased by 0.10 to average, within the individual sectors there were 0.78 (previous year: 0.68). (Figure 30) some significant changes compared to the previous

Average unlevered beta factors Average unlevered beta factors by industry 29 Total 30

1.0 Automotive 1.01 0.97 Chemicals & Pharmaceuticals 0.83 0.8 0.90 0.89 0.86 0.89 0.80 0.85 0.83 0.85 0.85 Consumer Markets 0.83 0.6 Energy & Natural Resources 0.76 Financial Services n/m 0.4 Health Care 0.79 Industrial Manufacturing 0.91 0.2 Media & Telecommunications 0.84

0 Real Estate 0.42 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ Technology 0.96 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Transport & Leisure 0.78 Source: KPMG, 2016 Total 0.85

0.2 0.4 0.6 0.8 1.0 1.2

value, which again was hit almost exactly this year. (0.90) industries. (Figure 32) The average levered beta factor applied decreased From this it can be concluded that the empirical compared to the previous year by 0.04 to 0.99. data of this study sufficiently represent the whole Because the level of the unlevered beta factor as market. This demonstrates that, at least in the aver- well as the cost of debt remained unchanged com- age of the impairment test, there are no systematic pared to the previous year, the slight decrease of errors in the estimation of the beta factor and there- the levered beta factor can only be attributed to the fore the systematic risk. lower debt ratio. (Figure 31; Figure 44, page 41)

Average levered beta factors Average levered beta factors by industry 31 Total 32

1.2 Automotive 1.15

1.0 Chemicals & Pharmaceuticals 0.99 1.10 1.08 1.05 1.05 1.04 1.02 1.02 0.99 1.03 0.99 Consumer Markets 0.95 0.8 Energy & Natural Resources 0.89 0.6 Financial Services 1.03 Health Care 0.90 0.4 Industrial Manufacturing 1.11 0.2 Media & Telecommunications 0.95

0 Real Estate 0.70 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ Technology 1.12 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Transport & Leisure 0.97 Source: KPMG, 2016 Total 0.99

0.2 0.4 0.6 0.8 1.0 1.2

Source: KPMG. 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 31 3.5 Cost of Equity sated for by the increase in the market risk pre- Average cost of equity by industry mium. (Figure 33) 34 (in percent) With the CAPM, the levered cost of equity results A comparison of the individual industries clearly 8.8 from the risk-free rate, market risk premium and the shows differences in the development of the Automotive 9.8 levered beta factor. average cost of equity applied. While significant 7.9 decreases were observed in the automotive, Chemicals & Pharmaceuticals 7.7 The trend of sinking levered cost of equity that was industrial manufacturing and media & telecom- 7.8 observed in the last few years continued. After munications industries compared to the previous Consumer Markets 8.4 percent in the past year, it now sank to 8.2 per- year, higher costs of equity were found in the finan- 7.8 cent. This decrease resulted from the changes in cial services and health care sectors. In the other 7.3 Energy & Natural Resources the individual parameters described above. Here, industries, the development remained relatively 7.8 the cost-of-equity decreasing effects resulting from constant. (Figure 34) 8.4 the lower risk-free rate were only partially compen- Financial Services 7.9 7.6 Health Care 6.9 8.7 Industrial Manufacturing 9.3 Average levered cost of equity 8.0 33 Total (in percent) Media & Telecommunications 8.7 6.0 12 Real Estate n/a

10 9.1 Technology 10.1 9.9 9.8 8.7 8 9.5 9.5 9.3 9.1 8.9 8.7 7.9 8.4 8.2 Transport & Leisure 6 7.9 8.2 4 Total 8.4

2 2 4 6 8 10

0 2015/2016 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2014/2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: KPMG, 2016

Average levered cost of equity Germany / Austria versus Switzerland 35 (in percent)

8 8.5 8.1 8.1 8.6 6

0 2014/2015 2015/2016

Germany / Austria Switzerland

Cost of Capital Study 2016 33 Risk Transparency and Risk Management

As described in the key topic “New methods of and justifying comprehensible measures and recom- Frequently, the reason for this is the narrow focus value measurement?!” (page 10), today’s valua- mendations for action to reduce risk. on theoretical equilibrium models, which should tion methods can only reproduce reality to a limited degree. They only describe the equilibrium ideal status (which is never attainable) in which in theory Can theoretical models completely reflect risks relevant for the marginal price? “the market rewards only the so-called systematic risk”. For an active and transparent risk manage- 36 ment, however, corporate practice requires recommendations for practicable options that the current approaches are not able to provide. Subsequently, Market Investment horizon Industry risks Company there is always the threat of valuation errors in terms of an incomplete consideration of risk where “Speculation” Business model risks a decision-making situation does not reflect an ideal of market participants equilibrium state. That is probably frequently the case – theoretical approaches and real problems seldom overlap. Degree of Fungibility of shares diversification In the theoretical version of the “perfect market” all the company owners have comprehensive information about all the risks of all the existing investment opportunities. But where does this informa- Risk in fictitious tion come from in reality? Does it really exist? What equilibrium decisions is it based on? Who is responsible for it? In real valuations, the company leaders are initially confronted with decision-making situations about different options. The CEO and CFO are, of course, Degree of diversification Access as company supposed to act in line with shareholder value. But at the same time, the focus of their actions is oriented less on an idealized model situation than on the concrete strategic direction and long-term sur- Subjective risk Timing vival of their company in the highly competitive and preferences complex markets. In the field of strategic consulting there is seldom a dearth of performance-increas- Number of owners Access as owner ing options; more frequently many decision-makers Owners Information and their advisors have difficulties in determining

Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. only explain how risk is to be considered in a per- take into consideration the “basic” operative risks “The purely market-oriented risk reflection in fect market; they do not offer practical options. That in the valuation of the alternative actions on the the determination of the cost of capital reg- cannot, however, be the aim of real corporate deci- basis of the comparative peer-group method. On ularly blocks out possible alternative actions sions, where it is a matter of positively influencing the basis of the three-stage decision-making pro- for the company for a targeted risk manage- the risk profile of the own company. cess described – corresponding to previous perfor- ment. The optimal corporate decision requires mance-increasing measures – it is now possible to not only the recognition of primary risk drivers, To compare several alternative options, it is ini- also name concrete recommendations for action for but also in particular the transparency about tially required for the CEO and CFO to know the corporate decision-makers for the reduction of risk to what extent these can be influenced and the expected financial consequences (performance) in accordance with the degree and to consistently resultant opportunities for active change in the and the risk associated with the decision. “Risk” and transparently quantify the associated effects. In costs of capital relevant for the decision.” here means the possible deviations of reality from this manner, it is possible to adequately assign the a financial expectation (scattering of the expected actual cost of capital to various options with vary- Dr. Andreas Tschöpel performance parameters). Because the decision is ing operative risks. And that even where previous Partner, KPMG in Germany made against the background of an existing busi- approaches based on peer-group comparisons fail ness, it is necessary in a second step to investigate due to a lack of comparability. Advantages result for the corresponding performance and risk effects of both internal steering as well as for accounting pur- Along with an adequate consideration of risk, the the options on the company in terms of synergies poses. Poor decisions, often observed in practice risk components can be directly allocated to the risk (performance synergies and diversification effects). due to uniform group-wide costs of capital, can be drivers associated with the alternative actions. This Then, in a third step, the expected effects in terms avoided, because on the basis of the individual costs increases the risk transparency in the decision-mak- of an (idealized) capital market perspective have to of capital, the actual value-increasing options are ing process and provides opportunities for active be estimated, especially if the individual options are identified and performed. risk management. associated with a corresponding change in the business model. With these three steps, it is possible to The composition of the specific new overall cost determine transparent and consistent options and of capital for the company from the cost of capi- information for the decision-making and the sub- tal of the individual company units and the specific sequent capital market communication. (Figure 36, options can be determined quickly and transpar- page 34) ently. This allows for valuable information on the company’s risk profile to be obtained and appropri- The breakdown of the value contribution of the indi- ately communicated. This, in turn, contributes to vidual options into their performance and risk com- detecting the differences between the expectations ponents is one element of KPMG’s decision-making of the market participants (with regard to the quasi method CEDA, which offers numerous advantages “new company” after the action has been taken) over former methods with regard to company trans- and those of the company management and to bet- parency and corporate steering. The established ter anticipate possible repercussions for the market models have attempted – in the best cases – to capitalization of the company. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 35 3.6 Other Risk Premiums The country risk premiums continue to represent miums and thus, for instance, the market risk pre- the most frequent additional risk premium applied mium for Germany is supplemented by an additional by the study participants. This year, it was applied country risk premium. Other risk premiums, such as The results of this year’s study show that addi- by 40.3 percent of the companies and therefore by the implicit consideration of other risk factors in the tional risk premiums have become more important significantly more study participants than in the pre- market risk premium or the small size company pre- for participating companies in determining the cost vious year when only a quarter of the companies mium, by contrast, became relatively less important of capital. While in the past year 45.9 percent of surveyed considered a country premium. One rea- compared to the previous year. the study participants considered other risk premi- son for the increasing popularity of the country risk ums in determining the cost of capital, this year, at premium could be that it is becoming increasingly 52.0 percent, more than half did so. (Figure 37) difficult to empirically measure local market risk pre-

Other risk premiums 2014/2015 versus 2015/2016 37 Total (in percent, multiple choices possible)

50 54.1

40 48.0 40.3 30

20 25.7 16.9 10 5.1 5.4 2.7 2.0 0.5 2.7 3.1 10.7 0 8.1 7.4 6.1 6.1 0.0 Country risk Flat rate Implicit with Small size Risk premium Risk premium Risk premium Other No additional premium premium on the the increase of company for planning for insolvency for financial risks risk premiums cost of capital the market risk premium uncertainties risks premium

2014 / 2015 2015 / 2016 Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. The application of other risk premiums continues 2015/2016 (previous year: 47.1 percent). (Figure 39, “The increased uncertainty for companies and to differ significantly from region to region. While page 38) the high market volatilities have attributed to in Germany 48.0 percent of the study participants risk premiums tending to increase in Austria apply other risk premiums (Figure 38), this portion Regional differences exist not only in the general and now only few companies do not apply any was comparable for participants in Switzerland with importance of other risk premiums, but also in the other risk premiums when determining the 51.7 percent and significantly higher for the partici- type of premiums applied. While the country risk cost of capital. Two-thirds of the companies pants from Austria with 84.2 percent. The develop- premium was the primary premium in Germany surveyed reflect the increased risks by means ment in Austria is particularly noticeable. The per- (about 40 percent) and in Austria (nearly 70 per- of the country risk premium.” centage of Austrian participants that consider risk cent), as in previous years, in Switzerland the small premiums increased by nearly 20 percentage points size company premium played an important role Dr. Klaus Mittermair over the previous year (previous year: 64.7 per- (2015/2016: 24.1 percent, previous year: 24.1 per- Partner, KPMG in Austria cent). Especially the use of country risk premiums cent). (Figure 40, page 38) increased dramatically and was 68.4 percent in

Additional risk premiums 2015/2016 38 Germany (in percent, multiple choices possible)

50 52.0 40 40.5 30

10 1.4 4.1 2.0 1.4 0 6.1 0.0 7.4 Country risk Flat rate Implicit with Small size Risk premium Risk pre- Risk premium Other No addi- premium premium the increase company for planning mium for for financial tional risk on the cost of the market premium uncertainties insolvency risks premiums of capital risk premium risks

Cost of Capital Study 2016 37 Additional risk premiums 2015/2016 3.7 Cost of Debt and Debt Ratio 39 Austria (in percent, multiple choices possible)

70 Cost of debt

60 68.4 Along with the cost of equity, the cost of debt rep- 50 resents the second determinant for the derivation of

40 the weighted average cost of capital.

30 The main approaches applied in the practice of 20 determining the capital structure and the cost of 21.1 debt are shown in Figure 41. It should be noted that 10 5.3 5.3 15.8 10.5 10.5 10.5 10.5 only the determination of the capital structure and 0 the cost of debt from a peer group – analogous to Country risk Flat rate Implicit with Small size Risk premium Risk pre- Risk premium Other No addi- the method for the beta factor – meets the required premium premium the increase company for planning mium for for financial tional risk market perspective according to IFRS. on the cost of the market premium uncertainties insolvency risks premiums of capital risk premium risks As in the previous year, the majority of the compa- Source: KPMG, 2016 Additional risk premiums 2015/2016 nies surveyed met this IFRS requirement. Never- Switzerland (in percent, multiple choices possible) theless, while the vast majority of the study par- 40 ticipants in the last year (81 percent) used the peer group parameter, especially in the calculation of the 50 fair value less costs of disposal, significantly fewer

40 48.3 of participating companies used this approach this year. (Figure 41, page 39) 30

20 24.1 20.7 20.7 10

0 0.0 6.9 6.9 0.0 6.9 Country risk Flat rate Implicit with Small size Risk premium Risk pre- Risk premium Other No addi- premium premium the increase company for planning mium for for financial tional risk on the cost of the market premium uncertainties insolvency risks premiums of capital risk premium risks

Determination of capital structure and cost of debt Average cost of debt 41 Total (in percent, multiple choices possible) 42 Total (in percent)

70 7 60 6 6.4 61 59 6.0 50 5 5.8 5.6 5.2 5.4 40 4 4.4 4.6 30 3 3.4 3.4

20 2 20 21 10 1 12 11 9 12 0 0 Current capital Target capital Derivation of the Other 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ structure at structure at market capital structure 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 market values and values and target and cost of debt Source: KPMG, 2016 cost of debt of the cost of debt of the from a peer group group / CGU group / CGU

Value in use Fair value less costs of disposal

Cost of Capital Study 2016 39 Average cost of debt by industry With the development of the cost of debt, it is espe- “The development of the risk-free rate, cost of (in percent) 43 cially noticeable that the decrease of 0.1 percent- equity and cost of debt show that the low-in- age points each in the German and Austrian com- terest policy of the central banks was offset 2.5 panies was much less than the decrease of the by higher risk premiums for both the cost of Automotive 2.8 risk-free rate. For the Swiss study participants, the equity and the cost of debt and thus the cost of 3.4 cost of debt even increased, although the risk-free capital remained the same for the companies.” Chemicals & Pharmaceuticals 3.1 rate decreased marginally by 0.1 percentage points. It can therefore be assumed that the average risk 3.1 Stefan Schöniger Consumer Markets premiums (so-called credit spreads) required by the Partner, KPMG in Germany 2.8 lenders increased in both Germany and Austria and 3.7 even stronger in Switzerland. Energy & Natural Resources 3.2 4.0 While overall the average costs of debt remained Financial Services 3.4 constant, some material developments were to be 3.1 observed within the sectors. The largest increases Health Care 3.4 were in the financial services and technology sectors where the cost of debt increased in each by 3.9 Industrial Manufacturing 0.6 percentage points to 4.0 percent and 3.5 per- 3.6 cent, respectively. The largest reduction, by con- 3.2 trast, was to be found in the media & telecommu- Media & Telecommunications 3.7 nications sector, where these costs decreased by 3.2 0.5 percentage points to 3.2 percent. (Figure 43) Real Estate n/a 3.5 When considering the average cost of debt for all Technology 2.9 the surveyed companies and the individual industries, it should be noted that the data stems from 3.7 Transport & Leisure companies from different countries, partially from 4.1 different currencies and from varying points of time. 3.4 Total 3.4

1 2 3 4

2015/2016 2014/2015

Average debt ratio Average debt ratio by industry 44 Total (in percent) 45 (in percent)

40 Automotive 19.7 39.9 35 36.7 Chemicals & Pharmaceuticals 18.1 30 Consumer Markets 20.2 32.8 32.9 32.0 30.9 25 28.8 28.6 Energy & Natural Resources 39.3 26.2 20 25.3 Financial Services n/m

15 Health Care 13.8

10 Industrial Manufacturing 23.0

5 Media & Telecommunications 28.1

0 Real Estate 54.9 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ Technology 18.4 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Transport & Leisure 33.0 Source: KPMG, 2016 Total 25.3 10 20 30 40 50 60

Cost of Capital Study 2016 41 3.8 Sustainable Growth Rate responding profit retentions. Due to the fact that About 46 percent of the participants applied general the growth rates derived from sales and earnings economic growth and inflation rates for determin- growth rates are, however, frequently within the ing the sustainable growth rate. Only 13 percent of About 54 percent of the study participants applied range of the company’s historical inflation rate, in the participating companies applied company-spe- sales and earnings growth rates from the past or practice they generally match the normally estab- cific inflation rates. Due to the fact that only com- detailed planning to determine the sustainable lished distributable cash flows. The equivalence pany-specific inflation rates can properly reflect growth rate. This method may disguise concep- therefore appears to exist in general, despite the the individual sales and procurement markets as tual weaknesses with regard to the equivalence conceptual weakness. (Figure 46) well as any potential increase in efficiency, they are between the cash flow and growth rates applied, preferred in the measurement of the sustainable due to the fact that it is only correct if the cash flow growth rate to general (consumer-oriented) inflation actually used for the valuation is reduced by cor- rates.

Measurement of the sustainable growth rate 46 Total (in percent, multiple choices possible)

30 35

20 24 20 15 18 10 13 11 5 10

0 Past growth of Growth rate of Growth rate of Growth rate of General Company-specific Other company earnings product/product industry sales gross domestic (consumer-oriented) inflation rate group sales product inflation rate

the individual countries. While the average growth manufacturing and technology used the highest rate in Germany decreased from 1.4 percent in the growth rates. Only in the field of real estate was a previous year to 1.2 percent, in Austria and Switzer- growth rate of less than 1 percent expected. (Fig- land there was an increase of 0.2 percentage points ure 48) and 0.1 percentage points, to 1.3 percent and 1.5 percent, respectively. (Figure 47)

Sustainable growth rate Sustainable growth rate by industry Germany versus Austria versus Switzerland (in percent) 47 (in percent) 48

1.5 Automotive 1.1 1.5 1.4 1.4 Chemicals & Pharmaceuticals 1.2 1.2 1.3 1.2 Consumer Markets 1.3 0.9 1.1 Energy & Natural Resources 1.1 Financial Services 1.3 0.6 Health Care 1.4 Industrial Manufacturing 1.4 0.3 Media & Telecommunications 1.1

0 Real Estate 0.9 54.9 Germany Austria Switzerland Technology 1.4 Transport & Leisure 1.3 2014/2015 2015/2016 Total 1.3

Source: KPMG, 2016 0.3 0.6 0.9 1.2 1.5

Cost of Capital Study 2016 43 4 Impairment Test

© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 4.1 Trigger and Results The participants most frequently recognized an The amount of the impairment developed differ- impairment on the individual assets (2015/2016: ently compared to the previous year. With the asset 32 percent; previous year: 33 percent). The per- impairments the average write-down increased The percentage of the study participants that rec- centage of the companies that recognized both an slightly to 102 million euros (previous year: 100 mil- ognized an impairment on goodwill or assets in asset impairment as well as a goodwill impairment lion euros). With goodwill the average impairment the group financial statements was, at 55 percent, decreased from 19 percent in the previous year to decreased to 69 million euros this year (previous slightly below the level of the previous years. 15 percent. Only 8 percent of the companies recog- year: 89 million euros). (Figure 49) nized an impairment exclusively on goodwill (previous year: 7 percent). (Figure 50)

Recognition of an impairment Recognition of an impairment 49 Total (in percent) 50 Total (in percent)

70 Asset impairment Goodwill impairment 60 Both 60 59 61 59 No impairment 50 55 57 55 32 51 40 45 30

20 8 10 15

0 2008/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2009 2010 2011 2012 2013 2014 2015 2016 Source: KPMG, 2016

Cost of Capital Study 2016 45 This year about half of the participating compa- As in the previous year, in the cases in which a trig- nies performed an unscheduled impairment test gering event initiated the impairment test, the most as a result of a so-called triggering event, which is frequent reason was, with 59 percent, a change an indicator of an impairment of value (2015/2016: in the estimate of the future development (poorer 49 percent; previous year: 53 percent). (Figure 51) long-term expectations). Only 3 percent of the

study participants reported the cost of capital as the triggering event for an impairment. An additional 42 percent reported “Other triggering events”, which were not present in the previous year. (Figure 52)

Triggering event Cause of the triggering event 51 Total (in percent) 52 Total (in percent, multiple choices possible)

Triggering event 60 for assets 59 Triggering event 50 27 for goodwill Both 40 No impairment test due 42 30 51 to triggering events 8 20 23 14 10 14 3 0 Decrease in Price decline Lower long-term Cost of capital Other Source: KPMG, 2016 orders expectations

36.6 and IAS 36.18 as the higher of the two follow- the varying regulations for the consideration of the the individual CGUs. Only 10 percent of the study ing sums: Fair value less costs of disposal and value restructuring measures and expansion investments participants applied market-oriented methods and in use. in the financial forecast, even if the number of com- 4 percent both methods. (Figure 54) panies continues to appear very high. The number of companies that determined only a value in use increased slightly in the course of the year to 62 percent (previous year: 58 percent). Only 17 percent (previous year: 20 percent) of the companies determined exclusively a fair value less costs of disposal. The percentage of companies that used both valuation concepts remained roughly unchanged compared to the previous year. (Fig- Method for determining the recoverable amount Valuation method for the determination of the fair ure 53) Total (in percent) value less costs of disposal 53 54 Total (in percent) As in the previous years, regional differences could again be found in the determination of the recov- 70 DCF method 4 Market-orientated erable amount. A comparison of the total with the 60 10 method 62 individual results from Switzerland shows that the 58 Both trend of the previous years continued and the com- 50 panies located in Switzerland applied the value in 40 use method, with 79 percent, more frequently than the other areas surveyed. In contrast to the previ- 30 ous year, a greater percentage of the study par- 20 ticipants in Austria also applied only the value in 20 22 21 10 17 86 use approach this year (72 percent; previous year: 53 percent). 0 Value in use Fair value Both Source: KPMG, 2016 less costs of disposal

2014/2015

2015/2016 Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 47 4.3 Plausibility Plausibility of valuation results Due to the fact that the market capitalization fre- Listed companies quently only reflects to a limited degree the shares 55 Total (in percent, multiple choices possible) traded that generally hold the control or a relevant Due to the fact that the fair value less costs of dis- influence on the company, it may be recommend- posal concept is a matter of the exit price and, 30 able within the reconciliation to consider a control therefore, primarily a matter of the estimate by the premium. Furthermore, in a comparison of the fig- potential purchasers, the IFRS, especially for this ures obtained according to the value in use method concept, foresees a plausibility test of the main 34 with the market capitalization, the valuation per- parameters with the expected values of the mar- spective and the information available to the capital ket participants. To assure the risk equivalence of 15 market could play a role. Therefore, along with the the cost of capital, we recommend also perform- 66 market capitalization of the group, the industry and ing a comparison with the market expectations 16 analysts’ reports as well as multiples should always when calculating the value in use. This allows for be used for the plausibility test. divergences between the market and management expectations to be scrutinized and, if necessary, for 5 In the DAX 30, the majority of the participating com- adjustments to be made in the cost of capital. Yes panies performed a plausibility check of the val- Yes, with the market capitalization of the group ues derived, whereby the percentage decreased In the last year, a total of 66 percent of the listed Yes, with multiples by 14 percentage points compared to last year study participants performed a plausibility test of Yes, with analysts’ target price or (2015/2016: 83 percent; previous year: 97 percent). the valuation results using market expectations analysts’ sum-of-the-parts valuations In the framework of the plausibility test, the partic- Yes, on the basis of other factors (previous year: 72 percent). It is noticeable that the No ipants primarily depended on the market capital- percentage of companies that performed the plau- ization of the group (32 percent). But the multiples sibility test on the basis of the group’s market cap- Source: KPMG, 2016 were also used by 20 percent and analysts’ target italization increased to 30 percent (previous year: prices or analysts’ sum-of-the-parts valuations by 21 percent), while the portion that performed a plau- 22 percent. sibility test on the basis of multipliers or analysts’ target prices decreased (previous year: 30 percent and 17 percent, respectively). The plausibility test based on market capitalization is especially well suited with regard to enabling the comparison of the total of all CGUs with the market capitalization of the group. (Figure 55) © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Comparison of market capitalization to fair value Of the one-third of the listed corporations partic- less costs of disposal ipating that determined the market capitalization 56 Listed companies (in percent) in relation to the calculated fair value less costs of Less than half as high disposal, in 9 percent of the companies the market 3 6 Much lower (less than capitalization was at least 10 percent below the fair 10 percent to maximum value determined and in 11 percent at least 10 per- half as high) 13 About the same (plus/ cent above. With value in use, the market capitaliza- minus 10 percent) tion was at least 10 percent lower (higher) in 22 per- 67 6 Much higher (more cent (23 percent) of those surveyed. (Figures 56 5 than 10 percent to and 57) maximum twice as high) More than twice as high Not considered

Source: KPMG, 2016

Comparison of market capitalization to value in use 57 Listed companies (in percent)

Less than half as high 6 Much lower (less than 10 percent to maximum 16 half as high) About the same (plus/ 43 minus 10 percent) Much higher (more 12 than 10 percent to maximum twice as high) 13 More than twice as 10 high Not considered

Cost of Capital Study 2016 49 5 Relevance of Value and Enhancement of Value © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Value-based Management Systems 2.0

Corporate decisions should always be oriented on of their simple application and a lack of practical long been our central control parameter, but for their impact on value. For business leaders, the alternatives. That is at least true for reporting to the us it has become less important, as in business in “price tags of the individual options” which quan- capital market. This does not mean that it is there- general.”2 In view of the conceptual weaknesses, tify the value form the assessment and decision- fore possible to make any statements about to what the loss of importance observed or the admission making benchmark at the corporate level. With extent these concepts are actually being “lived” of the insignificance of the established methods these, shareholders obtain knowledge about the by the companies. There does, however, seem to as value-based management systems is not a sur- potential increase of their invested capital. In prac- currently be a change in thinking in the framework prise. In particular, the increasing expectations and tice, however, it has been demonstrated time and of value-based management, not least of all as a demands of the management and the shareholders again that there are differences between the value result of the dynamic and volatile market develop- in the current and future expected market environ- expectations of business leaders and sharehold- ments. One annual report noted: “Value added has ment are the reasons for this. After all, one impor- ers, differences that as a rule can be attributed to varying information about the performance to be expected and the risk of an option associated with Development of (value-based) management systems this. In the framework of corporate communication, 58 value-based management systems should make a contribution to closing this gap and assist in answer- Even the risk-oriented methods developed by KPMG … ing the question as to how the development of the cannot guarantee an increase in value. They do, however, An improved assessment of the value enhancement provide performance and risk transparency and form the shareholder value for a certain period should be makes it possible, on the basis of the economic profit, basis for the optimal decision that, in the end, leads to an to determine the change in the company value. CEDA increase in value. properly measured and how this can be communi- Steiner/Wallmeier3 KPMG Cost of Capital Study 2014, p. 15 cated in a transparent manner. Corporate Economic The reproduction of the economic The operational focus with CEDA on Complete Decision Assessment Performance and consideration of risk

profit is the ideal, because it represents the performance and risk development Flexible the only relevant decision-making closes the gap between strategic parameter. company orientation and quantifiable In corporate practice there are numerous meth- 4 Performance Risk Böcking/Nowak value enhancement for the stakeholder. ods for company steering that have evolved over KPMG Cost of Capital Study 2015, p. 13 Value orientation

Future-oriented The periodically determined time from very simple comparisons of absolute and residual income itself does Measuring value and Measuring value relative parameters (such as EBIT and EBIT mar- analysis change value not provide any information about increases in value The value contribution … has gin) to so-called residual profit or value contribution and therefore provides erro- become less important for neous information about us – as in operational practice the internal steering. in general. concepts (such as Economic Value Added, EVA, 5 Bergmann/Schultze/Weiler Economic profit concept RWE-Geschäftsbericht 2015 or Cash Value Added, CVA). Despite the numer- Partial ous, justified criticisms in literature that these pro- Rigid Residual income or “value contribution” concepts: cedures are unsuited for a proper measurement of For instance, EVA, CVA, business value contribution value and therefore may lead to improper steering, Rigid Risk: None they have been dominant in practice – as a result Relative KPI: Performance: For instance, sales growth, EBIT margin, interest cover ratio None of success Past-oriented Absolute KPI:

2 RWE-Geschäftsbericht 2015, p. 53 measurement Periodic For instance, sales, EBIT/EBITDA, operative cash flow 3 See Finanz-Betrieb, 5/1999, p. 1 – 10 4 See Finanz-Betrieb, 10/1999, p. 281 – 288

5 See Controlling, 10/2012, p. 554 – 560 Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 51 tant disadvantage of these methods is that as a rule take into account growing uncertainties and the lack “Due to conceptual weaknesses, numerous they depend on historical data and their possibili- of understanding of the company’s future perfor- steering systems on the market are only suited ties for compiling and processing the relevant value mance and risk development. The requirements for to a limited degree for a transparent and con- determinants – performance and risk – are regularly the “value-based management systems 2.0” are sistent value-oriented management. Fre- limited. The information they provided was possi- derived from this difference in expectations. Along quently, they are missing the necessary future bly sufficient in the previous, primarily stable market with an exclusive forward-looking approach, the orientation as well as a complete and flexible environment. For the current and future demands, increase or decrease in value actually achieved is reflection of the value-relevant performance however, they are only suited to a very limited relevant. Their determination is achieved – unlike and risk relation. Their importance for a capital degree. (Figure 58, page 51) with the past and accounting-oriented residual market communication in the current market income methods – on the basis of established val- environment is becoming increasingly limited. In addition, to date the performance-oriented anal- uation methods that allow a practicable determina- CEDA avoids these weaknesses and represents yses dominated the as-is situation. Future-ori- tion of the so-called “economic profit” as the proper a quick and unambiguous decision-making pro- ented statements generally occurred only qualita- benchmark for the required increase in value. The cess and the transparent communication of it.” tively. The actual risk profile of the company and its determination of the actual value contribution alone change were frequently not made transparent or is, however, an absolutely necessary, but insuffi- Dr. Andreas Tschöpel even blocked out. That holds the danger of a high cient step toward a value-oriented capital market Partner, KPMG in Germany performance possibly being misinterpreted if it is communication. After all, the value contribution contrasted with a non-transparent future risk. This is alone does not say on what it is based. For a proper one significant disadvantage of the residual income decision-making process, the performance and risk tion to the capital market communication and to the methods – as also with its improper and very sim- components that determine the value must be con- reduction of so-called expectation gaps by means of plified reference to balance sheet items for deriv- sistently broken down so as to allocate them to and a transparent representation of the relevant perfor- ing the value contribution. After all, for the mea- communicate their specific measures and drivers. mance and risk contributions. surement of the change in value, it is not the share Only in this way can a transparent linking of com- of the company’s book value that is relevant for the pany decisions by the management with the result- shareholder, but rather it is based on the capital he/ ing expected changes in value for the shareholders she invested to acquire the share at the time of the be made. Only the complete and flexible consider- value measurement. The determination of the spe- ation of the value drivers enables a truly value-based cific costs of capital as the minimum return, is fre- management. quently determined uniformly for the company and regularly without the concrete, corresponding con- With CEDA, KPMG applies a value-oriented deci- sideration of the specific risk profile of the company sion and steering method that fulfills the require- or the option. ments of company steering systems in the current and future environment and is superior to other Consequently, business managers might orient methods. It not only consistently and unambigu- themselves on improper benchmarks and share- ously determines the actual value potential of a busi-

holders perform precautionary discounts so as to ness option, but also provides a valuable contribu- © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 5.1 Criteria for Investment tative strategic objectives as the primary decision- Criteria in investment decisions Total (in percent) Decisions making criteria. (Figure 59) 59 Special attention should be given to the consider- The correct assessment of investment decisions ation of expected economic value added within the 6 6 represents a major challenge in the current market framework of assessing investment alternatives. 15 environment where there is a high degree of volatil- As shown above, these simplifying classical proce- ity and uncertainty. In addition, there is the danger dures may only to a limited degree meet the chal- 27 that as a result of inexpensive and readily available lenges and expectations of a modern decision- financing, the risks of an investment may be under- making criterion in the current and future market 7 estimated or not sufficiently considered. environment. 67

To be able to make sustainable, successful deci- Particular attention should be given to the fact that sions, it is therefore necessary to perform the most more static models such as EVA and ROCE gener- comprehensive analysis of the investment object ally compile valuation-relevant information of a com- Primarily value-oriented objectives (EVA, ROCE) possible, applying previously stipulated decision- pany only partially and that not even consistently. P rimarily strategic objectives making criteria. In practice, however, investment Their strong reliance on the past, the orientation on Primarily qualitative strategic objectives decisions are frequently only made on the basis of bookkeeping parameters as well as the lack or very (for instance, regional coverage) strategically qualitative (for instance, regional cover- limited equivalent consideration of risk may also Primarily quantitative strategic objectives (for instance, sales or margin targets) age) and/or quantitative (for instance, sales or mar- restrict the information provided by these methods. Qualitative and quantitative strategic objectives equally gin) objectives. We therefore recommend modern approaches that Strategic and value-oriented objectives equally are based on multi-value financial forecasts includ- Beyond that, companies also make investment deci- ing simulation and scenario analyses and consis- Source: KPMG, 2016 sions on the basis of alleged value-oriented objec- tently compile performance and risk effects and tives, such as the economic value added (EVA) or consider these in the valuation calculation. Value the return on capital employed (ROCE), that also and risk drivers of an investment project can then be attempt to take the investors’ return requirements presented transparently at an early date and consid- into account. ered appropriately in the decision-making process.

Therefore, more than two-thirds of this year’s study participants (67 percent) reported making their investment decisions equally on the basis of strategic and value-oriented objectives (previous year: 59 percent). While 6 percent of the companies primarily considered value-oriented objectives, the

remaining 27 percent applied quantitative or quali- © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 53 5.2 Monitoring the Enhancement As in the previous year, the results of our study “In principle, the increasing orientation of com- of Value show the growing importance of the monitoring of panies on the concrete changes in value – in value enhancement for the companies surveyed. terms of shareholder value – associated with For the overwhelming majority (82 percent), a val- their decisions is a welcome sight. In our opin- Investment decisions concluded must be continue-oriented monitoring represents an important ion, however, there is a need for an adjustment ually monitored with regard to their actual value aspect, especially for decision-making and steer- in the concept of the instruments applied, due enhancement so as to be able to react to changes ing purposes (previous year: 74 percent). For the to the fact that the majority of the “classical” in the market environment quickly and in a targeted remaining 18 percent of the participants, monitoring methods used to date either do not completely manner. Changes in value can only be transparently of the value enhancement either plays a less impor- consider, or do not consider at all, the neces- attributed to their causes, if the value drivers iden- tant role or none at all (previous year: 26 percent); sary influences on the performance and risks tified in the framework of the decision-making pro- these companies still focus primarily on the purely for a true determination of value. The conse- cess are continuously monitored with regard to their qualitative and strategic objectives in their invest- quence may be poor decisions.” impact on the company performance and the com- ment decisions and do not transfer them into mea- pany risk. surable value parameters. Karen Ferdinand Partner, KPMG in Germany In this manner it is possible to detect poor developments at an early stage and to take appropriate counter-measures. Furthermore, the knowledge Monitoring of the value enhancement In addition, we asked this year’s participants what gained can be transferred to future projects and 60 Total (in percent) they primarily orient themselves on when moni- investments and therefore improve the decision- toring. When monitoring, a total of about 56 per- making basis as well as the corporate communica- Change of cent of the participating companies focus only on tion. performance the change of performance and here on simple Change of risk KPIs such as sales, EBITDA, EBIT or ROCE. Less Both than half of the surveyed companies (43 percent) attempt to also consider the necessary change in 43 risk and the key risk indicators (KRIs). The focus 56 here, however, appears frequently to be only on the change of general market risks such as how these are reflected in the market risk premium. (Figure 60)

1 Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Company-specific changes in the risk profile that 5.3 The Role of the Cost of Communication and use of the cost of capital could serve to transparently reveal company options 61 Total (in percent) and the risks associated with them are almost never Capital in the Capital Market quantified. One reason for this could be that cur- Communication Cost of capital plays a rent methods fail to allow for a simultaneous perfor- 8 major role. It is the internal benchmark and mance and risk-oriented perspective in the frame- For the vast majority of the study participants, the 10 steering parameter and work of the decision-making process. For that, the cost of capital and company value and its develop- 4 is regularly discussed further developed approaches presented above can ment do not play a role in the capital market commu- with investors and be considered. In the capital market communication nication. For instance, the values determined in the analysts as well, the costs of capital and the possibilities to framework of the impairment test are used exclu- We use cost of capital impact on them obviously play a minor role (see sec- sively for accounting purposes and with the associ- and company values 78 from steering concepts tion 5.3) – even if they should be a significant com- ated reporting. A small percentage of the surveyed such as EVA for capital ponent of every valuation calculation and therefore companies, however, use the cost of capital deter- market communication every decision-making process. The reasons for mined in the framework of the impairment test as Other this are also to be found in the lack of understand- an internal benchmark and steering parameter and Cost of capital does able and reliable information about changes in per- also discuss them with investors and analysts on a not play a role. It is used exclusively for formance and risk associated with investments and regular basis. (2015/2016: 8 percent; previous year: accounting purposes their alternatives. 10 percent). and the associated reporting. In this manner, these companies increase their transparency for their investors and, with the regular discussion of the parameters, obtain insights into the divergences between management and market Source: KPMG, 2016 perspectives. This is, on the one hand, necessary to fulfill the partial market perspective required by IFRS and, on the other hand, contributes to including investor expectations in the observations right from the start.

Similar to the previous year, 10 percent of the study participants reported using cost of capital and company value from value-based management concepts (for instance, EVA) in the framework of the market communication (previous year: 11 percent). (Figure 61) © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 55 6 Industry

Analyses © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. In this year’s study, we once again examined the val- The largest growth compared to the previous year provide it to you individually. Furthermore, our indus- ues compiled according to the individual industries. was in the study participants from consumer try specialists are readily available for any questions As a consequence of particularities of the financial markets, financial services and technology. or comments you may have. services industry, we have selected an adjusted (Figure 62) form of presentation so as to better emphasize the More detailed analyses on the sectors can be found material specifics of the industry. For the first time, the real estate sector has an on our Cost of Capital website: independent industry analysis. www.kpmg.de/cost-of-capital In this year as well, the industrial manufacturing industry was the sector with the greatest number of In the following, we present an overview over time Please note that to the extent that the following participants. A total of 38 of the participating com- of the most important figures for the individual analyses contain data for the periods 2012/2013, panies classified themselves as such (previous year: industries. In addition, our industry specialists pro- 2013/2014, 2014/2015 and 2015/2016, the data 37 companies). The participants of this sector act in vide insights into the current trends in their sectors relates only to the surveys from those years. There- various industrial areas and primarily manufacture and an outlook for the expected developments. fore, it cannot be excluded that the following values industrial semi-finished products. are based on data from different companies and a Should you be interested in more detailed informa- different number of companies, therefore restricting tion on the specific sectors we would be pleased to the comparability to some degree.

Study participants by industry 62

30 37 38 32 20 28 27 23 22 24 19 19 19 10 17 18 17 16 14 15 15 13 4 11 0 7 Automotive Chemicals & Consumer Energy & Financial Health Care Industrial Media & Real Estate Technology Transport & Pharma- Markets Natural Services Manufacturing Telecommuni- Leisure ceuticals Resources cations

Cost of Capital Study 2016 57 6.1 Automotive

“On average slightly decreasing weighted aver- Average sales growth Average WACC applied Total versus Automotive Total versus Automotive age cost of capital were observed in the auto- 63 (in percent) 64 (in percent) motive environment. This development is especially attributable to two factors: On the 10 10 one hand, to the continuing historically low

8 8 risk-free rate, and, on the other hand, to the 8.2 somewhat lower beta factor. For that reason, 8.0 7.7 8.0 7.8 7.9 7.6 6 6 7.1 7.1 one could suspect that the long-term expected 6.1 6.0 5.9 returns in the automobile industry have slight- 5.5 4 4.9 5.3 4 ly decreased. Conversely this means that – 4.8

in contrast to the previous year – the risk pre- 2 2 mium in the automobile industry has not continued to rise. 0 0 This is of particular interest in view of the mega 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 trends of digitalization and electrification in the Total Total automobile industry, because they threaten Automotive Automotive the current business models. Along with the Source: KPMG, 2016 Source: KPMG, 2016 strong focus on products and technology, the future business models of automobile compa- Average unlevered beta factor applied Average debt ratio applied nies will deal with data and service-driven solu- Total versus Automotive Total versus Automotive tions along the entire customer lifecycle, which 65 66 (in percent) may contribute to a diversification of business 1.20 40 risks. 1.16 The investments required for this, however, 1.00 1.07 1.08 will have to be financed from the cash flow 1.01 30 34.5 from the existing business model, which will 0.80 0.89 28.8 30.0 28.6 0.83 0.85 0.85 26.2 at least increase the current investment and 0.60 20 24.4 25.3 financing risks. 19.7 It remains to be seen how these diversification 0.40 10 effects will impact on the long-term costs of 0.20 capital.” 0 0 Olaf Thein 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Partner, KPMG in Germany Total Total Automotive Automotive

“The global trends in the chemical industry in Average sales growth Average WACC applied Total versus Chemicals & Pharmaceuticals Total versus Chemicals & Pharmaceuticals the last few years will continue to serve as the 67 (in percent) 68 (in percent) primary stimulation of growth and as the key issues for the financial forecasts. While popu- 10 10 lation growth and the associated demand for everyday products will increase in the emerg- 8 8 8.0 ing markets, drivers such as energy efficiency, 7.7 7.8 7.3 6 6 7.2 7.1 6.8 7.1 environmental protection and regenerative 6.1 energies are gaining importance in the indus- 5.5 5.4 4 4.8 5.1 4.9 4.8 4 trialized countries. In the industrialized coun- 4.1 tries there will be a shift in demand to high- 2 2 value and innovative chemicals. Furthermore, the chemical companies will with time profit 0 0 from the increasing chemical intensity in the 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 end-products of many customer sectors. Total Total The government austerity measures in the Chemicals & Pharmaceuticals Source: KPMG, 2016 Chemicals & Pharmaceuticals Source: KPMG, 2016 health care system, the frequently much cheaper generics compared to the original preparations and the cost-intensive and risky development of new, high-revenue medica- Average unlevered beta factor applied Average debt ratio applied tions are slowing the growth expectations of Total versus Chemicals & Pharmaceuticals Total versus Chemicals & Pharmaceuticals the pharmaceutical companies. Almost every 69 70 (in percent)

manufacturer is struggling with expiring pat- 1.20 40 ents and the subsequent loss in sales and earnings. The companies are meeting these 1.00 challenges with portfolio optimizations and, 30 33.4 0.80 0.93 consequently, focusing on strategic indication 0.89 0.91 28.8 28.6 0.83 0.85 0.82 0.85 0.83 26.2 26.9 0.60 20 25.3 areas. To strengthen their pipelines in strategi- 22.2 cally important indication areas, pharmaceuti- 0.40 18.1 cal companies are increasingly making acqui- 10 sitions or trading entire businesses amongst 0.20 each other.” 0 0 Christian Klingbeil 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Partner, KPMG in Germany Total Total

Chemicals & Pharmaceuticals Source: KPMG, 2016 Chemicals & Pharmaceuticals Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 59 6.3 Consumer Markets

“Retail is undergoing a fundamental change. Average sales growth Average WACC applied Total versus Consumer Markets Total versus Consumer Markets With new technologies, above all the smart- 71 (in percent) 72 (in percent) phone, the consumer is in a position to better live out his/her personal behavioral and 10 10 consumer patterns across every sales chan- nel. At the same time, the new technologies 8 8 are attracting new competitors to the market 7.7 7.4 7.8 7.3 6 6 7.1 6.7 7.1 7.2 at a rate that has never been seen before. The 6.1 result of these developments is a so-called 5.5 5.5 5.7 4 4.9 4 ‘mobile consumption rate’, which has climbed 4.5 4.8 4.6

up to 50 percent in some product groups in the 2 2 German non-food sector. Mobile purchasing and payment will successively penetrate other 0 0 product groups – including groceries. In the 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 end, it will not be a matter of primarily offering Total Total goods in retail, but rather of knowing the needs Consumer Markets Source: KPMG, 2016 Consumer Markets Source: KPMG, 2016 structure of the customer and to be able to satisfy these as quickly and flexibly as possible. This development will continue to intensify over the next few years as will the paradigm Average unlevered beta factor applied Average debt ratio applied shift to customer-centered business models. Total versus Consumer Markets Total versus Consumer Markets The upcoming years will be exciting, with 73 74 (in percent)

strong new brands developing and others fad- 1.20 40 ing. At the moment, it appears that customers are increasingly placing their trust in holistic 1.00 offers and the corresponding technical plat- 30 0.80 0.89 forms.” 0.83 0.83 0.85 0.85 0.83 28.8 28.6 27.4 0.76 26.2 0.60 0.75 20 25.0 23.3 25.3 Karen Ferdinand 20.2 Partner, KPMG in Germany 0.40 10 Stephan Fetsch 0.20

Partner, KPMG in Germany 0 0 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Consumer Markets Source: KPMG, 2016 Consumer Markets Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 6.4 Energy & Natural Resources

“The majority of the listed energy providers rep- Average sales growth Average WACC applied Total versus Energy & Natural Resources Total versus Energy & Natural Resources resent an integrated generation and provider 75 (in percent) 76 (in percent) business that up to several months ago could be described as state of the art. But the energy 10 10 supply companies’ value-added chain will undergo rapid change. New business strate- 8 8 gies have to be defined – changes in the corpo- 7.7 7.8 6 6 6.8 7.2 7.1 7.1 rate structure will follow. They will also change 6.1 6.1 6.3 the risk profile. At the same time, the prospects 5.5 5.5 5.6 4 4.9 4 for the conventional generation business and 4.8 3.7 the trade with commodity products are weak. 2 2 Returns on network operations have dropped and in Germany expansion corridors as well 0 n/a 0 as market mechanisms for renewable ener- 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 gies have been introduced. Depending on how Total Total quickly the energy system transformation Energy & Natural Resources Source: KPMG, 2016 Energy & Natural Resources Source: KPMG, 2016 occurs, companies will (have to) adapt very quickly to a more fragmented business. At the same time, the sales business will change as a result of digitalization. Nevertheless, energy Average unlevered beta factor applied Average debt ratio applied supply will remain a stable business for the Total versus Energy & Natural Resources Total versus Energy & Natural Resources most part; this is demonstrated by the com- 77 78 (in percent)

paratively long-term consistency of the cost of 1.20 50 capital compared to the overall economy. The 1.00 reduction of the beta factor is significant; it can 40 fundamentally be attributed to the revocation 43.3 0.80 0.89 0.94 39.3 of growth premises. However, peer groups are 0.84 0.83 0.85 0.85 30 35.3 0.81 0.76 33.4 already partially changing, because new partic- 0.60 28.8 28.6 ipants are entering the market, amongst other 20 26.2 25.3 things as a result of digitalization.” 0.40 10 Michael Salcher 0.20 Partner, KPMG in Germany 0 0 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Energy & Natural Resources Source: KPMG, 2016 Energy & Natural Resources Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 61 6.5 Financial Services

“The financial services sector was characterized Degree of detail planning Measurement of the expected value Financial Services Financial Services in 2016 by continuing weak earnings as a result 79 (in percent) 80 (in percent) of the low-interest phase, increasing capital requirements and the search for sustainable 60 8 4 business models. The major challenge for all 50 financial service companies remains achieving 54 8 40 a sustainable level of return that is above the 47 cost of capital. 30 In the banking sector, many market partici- 31 20 29 80 pants are, along with the consistent optimiza- 24 tion of costs in the traditional fields of business, 10 15 focusing on digitalization, in particular the 0 Single-value estimate corresponding to the financial forecast Simple scenarios (best, normal, worst) and without expansion of the digital sales channels. Finan- Forecast Forecast of a P&L and Completely weighting of the scenarios of a P&L only additional selected integrated (P&L, cial technology as well as large Internet com- Simple scenarios (best, normal, worst) and weighting balance sheet items or balance sheet panies are increasingly going into competition with various probability of occurrence an entire balance sheet and cash flow) with the banks. More complex scenario analyses (for instance by In the insurance sector, the focus has, as a 2014/2015 means of Monte-Carlo simulations) result of the increasing capital requirements 2015/2016 Source: KPMG, 2016 Source: KPMG, 2016 from Solvency II, primarily been on the development of innovative and capital-efficient Average cost of equity Average levered beta factor products. In view of this, run-off solutions for Total versus Financial Services Total versus Financial Services capital-intensive business will increasingly 81 (in percent) 82

become a topic. 10 1.2 In the mid-term, additional consolidation should be expected in both the banking and 1.0 1.10 1.13 8 8.9 9.1 8.7 9.0 1.05 1.03 1.05 1.03 the insurance sector. What impacts the Brexit 8.4 8.2 8.4 0.99 0.99 7.9 0.8 decision will have on the financial centers in 6 Germany, Austria and Switzerland cannot 0.6 yet be determined and continues to remain 4 exciting.” 0.4 2 Gudrun Hoppenburg 0.2 Director, KPMG in Germany 0 0 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Financial Services Source: KPMG, 2016 Financial Services Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 6.6 Health Care

“The digitalization of the health care market will Average sales growth Average WACC applied Total versus Health Care Total versus Health Care become increasingly important in the future. 83 (in percent) 84 (in percent) Although this market offers extensive possibilities for application and will become more 10 10 multifaceted and individualized with the development of innovative solutions, health care is 8 8 well behind other markets in embracing digi- 7.7 7.9 7.8 7.6 6 6 7.1 7.1 6.9 talization. The e-health trend covers the entire 6.1 6.0 spectrum of care from the diagnosis to the fol- 5.5 5.7 5.7 4 5.2 4.9 4.9 4 low-up and offers the participants in the health 4.8

care market numerous opportunities, which in 2 2 turn are reflected in the corresponding company’s financial planning. 0 0 Clinics and other health-care institutions can, 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 for instance, optimize their processes with Total Total digital documentation systems and therefore Health Care Source: KPMG, 2016 Health Care Source: KPMG, 2016 combat the cost pressure. The increasing use of operational robots or wearables are offering medical technology companies opportunities for growth while trading companies can take Average unlevered beta factor applied Average debt ratio applied advantage of improved logistic solutions or the Total versus Health Care Total versus Health Care connection to digital office hours. 85 86 (in percent)

Overall, the development is also creating a 1.20 40 change in the market participants. Recently, a number of startups have been founded that 1.00 could represent interesting cooperation part- 30 0.80 ners or acquisition targets for the established 0.89 0.87 0.85 0.85 28.8 28.6 0.83 0.79 26.2 market participants.” 0.60 0.75 0.74 20 25.3 20.2 20.2 18.6 Patrick Klingshirn 0.40 10 13.8 Director, KPMG in Germany 0.20

0 0 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Health Care Source: KPMG, 2016 Health Care Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 63 6.7 Industrial Manufacturing

“According to the KPMG study ‘Global Manu- Average sales growth Average WACC applied Total versus Industrial Manufacturing Total versus Industrial Manufacturing facturing Outlook’, growth targets hold a high 87 (in percent) 88 (in percent) or very high priority for a majority of the manufacturing companies surveyed. Especially 10 10 Asian companies confirmed in the study an

8 8 ‘aggressive growth strategy’ that can be seen, 8.2 8.1 amongst other things, in the numerous inter- 7.5 7.7 7.8 7.6 6 6 7.1 7.4 7.1 national corporate acquisitions – in particular 6.1 by Chinese companies. The growth should, 5.5 5.6 5.4 4 4.9 5.2 4 according to the information of the companies 4.8

surveyed, primarily be realized by expanding 2 2 the product and service portfolio, the entry into new geographical markets and by new 0 0 business areas. 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Significant profitable growth – especially with Total Total limited market growth in the industrialized Industrial Manufacturing Source: KPMG, 2016 Industrial Manufacturing Source: KPMG, 2016 countries – is reserved for only a part of the companies. That will primarily be the companies that adapt their business model flexibly and with short reaction times to the volatile, Average unlevered beta factor applied Average debt ratio applied dynamic and customer-driven markets and Total versus Industrial Manufacturing Total versus Industrial Manufacturing combine technologies, know-how and sales 89 90 (in percent)

strategies from various sectors into new solu- 1.20 40 tions. At the same time, flexible, resource-efficient value-added chains that exploit the possi- 1.00 bilities of digitalization, automation and linkage 0.95 30 32.5 0.80 0.89 0.93 0.93 0.91 will be decisive for profitable growth.” 0.83 0.85 0.85 28.8 28.7 27.6 28.6 26.2 25.3 Dr. Jakob Schröder 0.60 20 23.0 Partner, KPMG in Germany 0.40 10 0.20

0 0 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Industrial Manufacturing Source: KPMG, 2016 Industrial Manufacturing Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 6.8 Media & Telecommunications

“The digital transformation continues to prog- Average sales growth Average WACC applied Total versus Media & Telecommunications Total versus Media & Telecommunications ress in the media & telecommunications sec- 91 (in percent) 92 (in percent) tor. The drop in circulation numbers in the traditional newspaper and magazine business 10 10 could be compensated by some media orga- nizations by investments in digital, sometimes 8 8 complementary, business models. Media com- 7.7 7.8 7.8 7.9 8.0 6 6 7.1 7.1 7.2 panies are following different strategies; for 6.1 instance, investments in educational, music 5.5 4 5.2 5.0 4.9 4.9 4.9 4 or trading activities. With the differing expan- 4.8

sion strategies, the media companies are fre- 2 2 quently no longer completely competing with one another. The digital transformation in the 0 0 media sector is therefore also resulting in the 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 boundaries to other industries blurring. Total Total This trend holds for companies in the telecom- Media & Telecommunications Source: KPMG, 2016 Media & Telecommunications Source: KPMG, 2016 munications industry as well – here, too, the strategies in the context of digitalization form the primary challenge for the future. The linkage of companies and consumers requires Average unlevered beta factor applied Average debt ratio applied investments in the expansion of an IP network Total versus Media & Telecommunications Total versus Media & Telecommunications infrastructure. Here, telecommunications 93 94 (in percent)

companies are confronted with the task of 1.20 40 combining the growing dynamics in the core business with the cross-sector cooperation 1.00 solutions so as to obtain a satisfactory return. 30 0.80 30.9 Consequently, further consolidations are to be 0.89 0.86 0.85 0.85 0.84 28.8 28.6 28.1 0.83 0.77 0.81 26.2 25.6 expected in the telecommunications industry.” 0.60 20 24.0 25.3 Dr. Vera-Carina Elter 0.40 10 Partner, KPMG in Germany 0.20

Stefan Schöniger 0 0 Partner, KPMG in Germany 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Media & Telecommunications Source: KPMG, 2016 Media & Telecommunications Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 65 6.9 Real Estate

“The economic growth and the low interest rate Planning horizon Average cost of debt applied Real Estate Total versus Real Estate level are benefiting the national real estate 95 (in percent) 96 (in percent) market. Germany is considered a safe ‘real estate haven’. The volume of transactions in 100 10 2015 was, with 56 billion euros, the second 100 highest of all time. In the meantime, the per- 80 8 centage of foreign and German investors in the 60 6 transaction market has become equal again. The demand will probably be similarly high in 40 4 4.6 2016 as well – however, with a comparatively 4.4 4.0 lower supply. 20 2 3.4 3.4 3.2 Increasing rents can be observed across the entire range of asset classes, from office space 0 0 0 0 0 n/a n/a to retail to apartments. The low interest level is One Three Five Other number 2012/2013 2013/2014 2014/2015 2015/2016 favorable for new investment projects. A price budget year planning planning of planning Total years years years increase in urban areas can be seen as a result Real Estate Source: KPMG, 2016 of the investors’ decreasing expectations on Source: KPMG, 2016 returns. So-called B and C cities are gaining greater attention due to the lack of alternatives. To what extent Brexit will impact on the mar- Average unlevered beta factor applied Average debt ratio applied ket for commercial real estate in the German Total versus Real Estate Total versus Real Estate metropolises has yet to be seen. 97 98 (in percent)

In the mid to long term the challenges for resi- 1.00 60 dential real estate will be, on the one hand, the 50 provision of affordable housing in major cities 0.80 0.89 54.9 and, on the other hand, the decreasing pop- 0.85 0.83 0.85 0.85 40 47.8 ulations in the rural areas. Office real estate 0.60 concepts have to provide an answer to the 30 increasing flexibility of the working world and 0.40 28.8 28.6 the markets for retail and logistics real estate 0.42 20 26.2 25.3 0.20 depend very much on the development of the 10 online trading.” 0 n/a n/a 0 n/a n/a Gunther Liermann 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Partner, KPMG in Germany Total Total

Real Estate Source: KPMG, 2016 Real Estate Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. 6.10 Technology

“Digitalization as the mega-trend continues to Average sales growth Average WACC applied Total versus Technology Total versus Technology determine the strategies of companies in the 99 (in percent) 100 (in percent) technology sector. The high rate of change is the primary characteristic. This dynamic 10 10 means that technology companies must continuously create a competitive advantage with 8 9.1 8 constant innovations. Of utmost importance in 7.8 7.7 7.8 7.8 7.9 7.9 6 6 7.1 6.8 7.1 this regard will be the expansion of the compa- 6.1 6.0 ny’s field of competence by means of acquisi- 5.5 4 4.9 5.1 4 tions and cooperations and, on the other hand, 4.8

investments with a startup character. Data ana- 2 2 lytics and industry 4.0 solutions are opening new process innovations that are not limited 0 0 to the technology sector, but might also stimu- 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 late new business models in other sectors. As Total Total a result, many traditional sectors will expand Technology Source: KPMG, 2016 Technology Source: KPMG, 2016 their technology competences through acquisitions and cooperations and enter into competition with purely technology companies.” Average unlevered beta factor applied Average debt ratio applied Dr. Gunner Langer Total versus Technology Total versus Technology Director, KPMG in Germany 101 102 (in percent)

1.20 50

1.00 40 0.96 0.96 41.5 0.80 0.89 0.94 0.90 0.85 0.85 30 0.83 32.4 0.60 28.8 28.4 28.6 20 26.2 25.3 0.40 18.4 10 0.20

0 0 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Technology Source: KPMG, 2016 Technology Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 67 6.11 Transport & Leisure

“The transport sector is faced with fundamen- Average sales growth Average WACC applied Total versus Transport & Leisure Total versus Transport & Leisure tal changes. It will not be possible to meet the 103 (in percent) 104 (in percent) challenge of increasing demand for the transportation of goods and persons by simply 10 10 expanding the capacities. For the transportation companies, it will be a matter of improv- 8 8 ing the utilization of their means of transporta- 7.7 7.4 7.8 7.6 6 6 7.1 6.7 7.1 6.9 tion. Linkage is the key here. Through linkage, 6.1 the various means of transportation will not 5.5 4 4.9 4.8 4 only be better connected with one another, 4.4 4.2 but they will be especially efficiently attuned 2 2 to one another. The basis for this will be live 2.7 data recording and analysis of transportation 0 n/a 0 streams and volumes. The analysis of passen- 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 ger numbers and travel patterns from public Total Total transportation can be used to reliably predict Transport & Leisure Source: KPMG, 2016 Transport & Leisure Source: KPMG, 2016 peak travel periods, while additional parameters such as weather data can serve to predict potential disruptions at an early time. In the transportation of goods, data can be used Average unlevered beta factor applied Average debt ratio applied to predict bottlenecks and for the planning Total versus Transport & Leisure Total versus Transport & Leisure of capacities. Networked vehicles, drones for 105 106 (in percent)

areas that are difficult to access and 3D print- 1.20 40 ers that produce spare parts directly on site represent the future for companies in the trans- 1.00 portation sector.” 30 33.3 33.0 0.80 29.9 30.0 0.89 0.83 0.85 0.85 28.8 28.6 0.78 0.78 26.2 25.3 Dr. Andreas Tschöpel 0.60 0.68 20 Partner, KPMG in Germany 0.40 10 0.20

0 n/a 0 2012/2013 2013/2014 2014/2015 2015/2016 2012/2013 2013/2014 2014/2015 2015/2016 Total Total

Transport & Leisure Source: KPMG, 2016 Transport & Leisure Source: KPMG, 2016 © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. List of Abbreviations

CAPM Capital Asset Pricing Model IDW “Institut der Wirtschaftsprüfer in Deutschland e. V.”: Institute of Public Auditors in Germany, Incorporated Association CEDA Corporate Economic Decision Assessment IFRS International Financial Reporting Standards CEO Chief Executive Officer

KPI Key Performance Indicator CFO Chief Financial Officer KRI Key Risk Indicator CGU Cash Generating Unit M&A Mergers & Acquisitions CVA Cash Value Added MDAX German (Mid-Cap) Stock Index DAX Main German Stock Index n/a Not available DAX-30 The 30 largest blue chips on the main German stock exchange n/m Not meaningful DCF Discounted Cash Flow P&L Profit & Loss Statement EBIT Earnings Before Interest and Taxes ROCE Return on Capital Employed EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization SDAX Small Caps, the companies following the MDAX with market EVA Economic Value Added capitalization and exchange turnover

FamDAX DAXplus Family 30 Index, consists of the 30 largest and most SFAS Statement of Financial Accounting Standards liquid family owned businesses (founding family holds at least 25 percent of the voting rights or seat in the management board SMEs Small and medium-size enterprises of advisory board and 5 percent of the voting rights) in the Prime Standard of the German Stock Exchange TecDAX The 30 largest technology companies on the German Stock Index

FAUB “Fachausschuss für Unternehmensbewertung und Betriebs- US-GAAP United States Generally Accepted Accounting Principles wirtschaft des IDW”: Technical Committee for Business Valuation and Economics of the IDW WACC Weighted Average Cost of Capital

IAS International Accounting Standards © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 69 Your Industry Specialists

KPMG in Germany Automotive Retail Chemicals & Pharmaceuticals Dr. Marc Castedello Consumer Markets Health Care Partner Stephan Fetsch Christian Klingbeil Deal Advisory, Partner Partner Head of Valuation Germany T +49 221 2073-5534 T +49 89 9282-1284

T +49 89 9282-1145 [email protected] [email protected] [email protected]

Media Building & Construction Chemicals & Pharmaceuticals Energy & Natural Resources Michael Hahn Health Care Prof. Dr. Vera-Carina Elter Director Patrick Klingshirn Partner T +49 711 9060-41163 Director T +49 211 475-7505 [email protected] T +49 89 9282-4594 [email protected] [email protected]

Energy & Natural Resources Financial Services Technology Industrial Manufacturing Gudrun Hoppenburg Media & Telecommunications Andreas Emmert Director Dr. Gunner Langer Director T +49 69 9587-2640 Director T +49 911 5973-3933 [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] © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Real Estate Industrial Manufacturing Automotive Andreas Lohner Dr. Jakob Schröder Industrial Manufacturing Director Partner Ralf Weimer T +49 89 9282-4926 T +49 211 475-8200 Director [email protected] [email protected] T +49 89 9282-1150

[email protected]

Financial Services Financial Services KPMG in Austria Rudolf Maurer Timo Schuck Director Partner Dr. Klaus Mittermair T +49 89 9282-1348 T +49 69 9587-1699 Partner [email protected] [email protected] Head of Deal Advisory Austria T +43 732 6938-2151 [email protected]

Energy & Natural Resources Automotive KPMG in Switzerland Michael Salcher Olaf Thein Partner Partner Johannes Post T +49 89 9282-1239 T +49 89 9282-1579 Partner [email protected] [email protected] Deal Advisory, EMA Head of Valuation T +41 58 249-3592 [email protected]

Consumer Markets Transport & Leisure Telecommunications Health Care Stefan Schöniger Dr. Andreas Tschöpel Partner Partner T +49 40 32015-5690 T +49 30 2068-1488 [email protected] [email protected] © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Memberare affiliated firms of the KPMG with KPMG network International. of independent All firms rights reserved. The KPMG name and logo are registered trademarks of KPMG International.

Cost of Capital Study 2016 71 Contact

Germany

Overall responsibility Technical coordination Stefan Schöniger Dr. Marc Castedello Deal Advisory, Valuation Deal Advisory, Head of Valuation Germany Partner Partner KPMG AG KPMG AG Wirtschaftsprüfungsgesellschaft Wirtschaftsprüfungsgesellschaft Ludwig-Erhard-Strasse 11 – 17 Ganghoferstrasse 29 20459 Hamburg 80339 Munich T +49 40 32015-5690 T +49 89 9282-1145 [email protected] [email protected]

Austria Switzerland

Dr. Klaus Mittermair Johannes Post Head of Deal Advisory Austria Deal Advisory, EMA Head of Valuation Partner Partner KPMG Alpen-Treuhand GmbH KPMG Holding AG Kudlichstrasse 41 Badenerstrasse 172 4020 Linz 8026 Zurich T +43 732 6938 -2151 T +41 58 249-3592 [email protected] [email protected] www.kpmg.de www.kpmg.de/socialmedia

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to Picture credits: © Photocase/riskiers (p. 1), obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such © iStock/elenaleonova (P. 8), © iStock/loops7 (p. 12), authority to obligate or bind any member firm. All rights reserved. The KPMG name and logo are registered trademarks of KPMG © iStock/blew_i (p. 20), © iStock/Eric Simard (p. 44), International. © iStock/ooyoo (p. 50), © iStock/Tutye (p. 56)