Risk-free interest rate
We refer to the current recommendation KFS/BW 1 E7 of the Expert Committee on Business Administration of the Austrian Chamber of Tax Advisors and Public Accountants to estimate the risk-free interest rate (base rate). The base rate is derived from the interest rate structure of German government bonds in a forward-looking manner, using the Svensson formula.
This approach generally results in maturity-dependent risk-free rates denominated in euros. For companies with an unlimited life span, the simplified application of the spot rate with a 30-year maturity, as recommended by KFS/BW 1 E 7, represents an acceptable approximation for a constant risk-free rate over time.
The development of the 30-year spot rate (updated daily) is shown in the following diagram:
Disclaimer
The information presented in this overview has been compiled from publicly available sources and is provided for informational purposes only. For binding information as of a specific date, please contact the person listed below. Grant Thornton Austria assumes no liability for the data used. The use of this data is permitted exclusively for non-commercial purposes.
Market return
According to the Working Group (WG) on Company Valuation, market returns can be derived implicitly from capital market data, i.e. from forward-looking analyst estimates and existing market prices.
We determine the implied market returns for the stock indices ATX, DAX, STOXX Europe 600, and MSCI World. These are calculated using a multi-period Dividend Discount Model (DDM) based on data from the financial services provider S&P Capital IQ. The composition of the stock indices is updated on an ad-hoc basis and quarterly (rebalancing).
For the first two forecast years, consensus dividend estimates are applied. In the third year, an appropriate dividend for the terminal value period is determined by multiplying the consensus estimate of projected earnings in year t+3 by a retention ratio (1 – g/r), in line with the Gordon/Shapiro model linking growth rate, retention ratio, and return on capital.
We assume that the long-term growth rate g corresponds to the long-term inflation expectation. Dividends and earnings are projected to grow proportionally to inflation during the terminal value period. Based on the European Central Bank’s long-term inflation target, we assume a growth rate of 2.0% per annum.
Furthermore, it should be noted that the WG on Company Valuation considers a range of 7.5% to 9.0% as an appropriate guideline for the implied market return (in accordance with the recommendation of KFS/BW1 E7 para. 4).
The choice of a specific stock index is controversial in valuation practice and academic literature. It is expressly emphasized that the presented market returns do not constitute recommendations for the use of any particular index and do not replace an independent, date-specific, and case-by-case assessment. Determining an appropriate reference index regularly requires consideration of numerous case-specific factors, such as the perspective of the valuation object, the regional distribution of peer group companies, and the prevailing view on capital market integration.
The following chart illustrates the implied market returns based on the approach described above:
ATX
Disclaimer
The information presented in this overview has been compiled from publicly available sources and is provided for informational purposes only. For binding information as of a specific date, please contact the person listed below. Grant Thornton Austria assumes no liability for the data used. The use of this data is permitted exclusively for non-commercial purposes.
Market risk premium
The market risk premium (MRP) is a key parameter in company valuation and measures the additional return that investors expect for assuming the systematic risk of equities compared to risk-free investments. In other words, it corresponds to the difference between the implied market return and the risk-free interest rate.
The choice of a specific stock index is controversial in valuation practice and academic literature. Similarly, the market risk premiums presented do not constitute a recommendation for the use of a particular index and do not replace independent, regular, and case-by-case assessments. Determining an appropriate reference index regularly requires consideration of numerous case-specific factors, such as the perspective of the valuation object, the regional distribution of peer group companies, and the prevailing view on capital market integration.
The following chart shows the development of the market risk premium as the result of the implied market return minus the risk-free interest rate:
ATX
Disclaimer
The information presented in this overview has been compiled from publicly available sources and is provided for informational purposes only. For binding information as of a specific date, please contact the person listed below. Grant Thornton Austria assumes no liability for the data used. The use of this data is permitted exclusively for non-commercial purposes.
