Cost of Capital in accordance with KFS/BW 1 E 7

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

                                                                               WACC = ^E/_D+E ∗ r_e​ + ^D/_D+E​ ∗ r_d​ ∗ (1−T)

The cost of equity (r_e) 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. Industry-specific cost of equity data and a detailed methodological description can be found on “Cost of Equity According to KFS/BW 1 E 7.”

The cost of debt (r_d) consists of the risk-free rate, country risk premiums derived from 5-year credit default swaps (CDS), and a debt premium (“credit spreads”). Credit spreads reflect company-specific credit risks. They are implicitly derived from the yields of similar corporate bonds. These corporate bonds have a maturity of 30 years, are denominated in euros, and assume a BBB rating.

The selection of the BBB rating is based on empirical evidence showing that the BBB rating class is the most common rating category. A BBB rating is an investment-grade rating and indicates moderate credit risk (see S&P definition). It reflects a company's capacity to meet its financial commitments while acknowledging that adverse economic developments may negatively affect its ability to do so. 

The sum of these components results in the pre-tax cost of debt. Taking into account the tax deductibility of interest on debt (“tax shield”), the after-tax cost of debt is subsequently 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 weighted average cost of capital (WACC) is ultimately derived from the weighted combination of the cost of equity and after-tax cost of debt. The weighting is based on a target capital structure of similar companies operating in the same industry and corresponds to the debt-to-equity ratio used in the derivation of the beta factors applied in the cost of equity calculation.

The range of the cost of capital shown is based on the implied market return of 7.5% to 9.0% recommended in KFS/BW 1 E 7, which is a key input in the determination of the cost of equity; in addition, the cost of capital corresponding to the midpoint of this range, i.e. 8.25%, is presented separately.