Cost of Capital Based on Stock Indices

The weighted average cost of capital (WACC) represents the weighted cost of equity and debt. It reflects the expected returns of all a company’s investors and is calculated as follows: 

                                                                               WACC = E/D+E ∗ re​ + D/D+E​ ∗ rd​ ∗ (1−T)

The cost of equity (re) is determined based on the Capital Asset Pricing Model (CAPM). The key input parameters include the risk-free interest rate, the market risk premium, the beta factor, and the country risk premium. Industry-specific cost of equity estimates and a detailed description thereof can be found on the "Cost of Equity Based on Stock Indices" page.

The cost of debt (rd) consists of the base interest rate, country risk premiums derived from 5-year Credit Default Swaps (CDS), and a debt risk premium ("credit spread"). The credit spreads reflect company-specific credit risks and are implicitly derived from the yields of comparable corporate bonds. These corporate bonds have a maturity of 30 years, are denominated in euros, and assume a BBB credit rating.

The selection of a BBB rating is based on empirical evidence showing that BBB is the most common rating category. A BBB rating is considered an investment-grade rating and indicates moderate credit risk (see S&P definition). It reflects a company's adequate capacity to meet its financial obligations while recognizing that adverse economic conditions or changing circumstances may impair this capacity.

The sum of the individual components results in the pre-tax cost of debt. Taking into account the tax deductibility of interest expenses (the "tax shield"), the after-tax cost of debt is then determined. For this purpose, the Austrian corporate income tax rate of 23% is applied, which is also broadly in line with the average corporate income tax rate across OECD countries.

The WACC is ultimately derived by combining the after-tax cost of debt and the cost of equity using a weighted average approach. The weighting is based on a market-standard target capital structure and corresponds to the debt-to-equity ratio used in the derivation of the beta factors underlying the cost of equity calculation.

The presented capital costs are based on implied market returns and market risk premiums derived for the ATX, DAX, STOXX Europe 600, and MSCI World equity indices. These inputs are relevant for determining the cost of equity.