Cost of Equity based on stock indices

The cost of equity is determined based on the Capital Asset Pricing Model (CAPM). The key input parameters are the risk-free rate, the market risk premium, the beta factor and the country risk premium.

For the estimation of the risk-free rate, we follow the current recommendation KFS/BW 1 E 7 issued by the Expert Committee on Business Administration of the Austrian Chamber of Public Accountants. The risk-free rate is derived on a forward-looking basis from the German government bond yield curve. In this context, the simplified application of the 30-year spot rate represents an acceptable approximation.

For the derivation of the market risk premium, we rely on the calculation of implied market returns for the ATX, DAX, STOXX Europe 600 and MSCI World equity indices. The implied market returns are determined using a multi-period dividend discount model (DDM) based on data provided by the financial information services provider S&P Capital IQ. Finally, we derive the corresponding market risk premiums by subtracting the risk-free rates from the implied market returns.

The beta factors are calculated on the one hand based on weekly returns over a two-year period, and on the other hand based on monthly returns over a five-year period. The unlevered beta factors are derived with reference to the STOXX Europe 600 index. The beta factors are unlevered using the Harris/Pringle formula. The debt-to-equity ratio is defined as the ratio of long-term debt to the market value of equity.

In addition, we consider the country risk premium for Austria, derived from 5-year credit default swap (CDS) spreads and adjusted by applying an equity multiplier.

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Cost of Equity based on stock indices