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 determina- tion 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.