Cost of Capital Study 2020

What impact does an ever increasingly changing economic environment have on the development of capital costs – assessments from more than 300 companie

Empirical study on the development of capital costs

The 15th edition of the Cost of Capital Study is entitled "Global economy – search for orientation?" The study uses sector-specific analyses to look at the effects of the increasingly dynamic economic environment, including the Covid-19 pandemic's impact on business models, budgets and long-term expected returns (cost of capital).

The latest Cost of Capital Study shows that planning uncertainty is growing, both on a macroeconomic as well as microeconomic level. On a microeconomic level, risks arising from innovative business models and disruptive developments as a result of digitalisation are increasingly being taken into account when budgeting in the participants' financial projections. However, a majority of those surveyed refrained from determining future cash flows using simulation-based procedures and continue to estimate individual values.

The cost of capital has decreased in almost all industries

The weighted average cost of capital (WACC) decreased across all industries from 6.9% in the prior year to 6.6% in the current reporting year. Overall, WACC developed uniformly across industries, with almost all sectors reporting a drop in the cost of capital. Exceptions here were the energy & natural resources and transport & leisure sectors, which were able to report a rise in WACC of +0.1 and +0.2 percentage points, respectively.

A declining cost of capital was evident especially in the automotive (-0.8 percentage points), chemicals & pharmaceuticals (-0.6 percentage points) and media & telecommunications (-0.6 percentage points) industries. At 7.7% and 7.4% in the technology and automotive sectors, respectively, the highest WACC was observed in those industries where political risks and technology-driven changes to business models have the most significant fundamental impact.

Assessments from more than 300 companies

This year's responses once again demonstrated the practical relevance of our annual Cost of Capital Study. Despite current challenges, a total of 309 companies – almost as many as in the previous year (312) – took part in our study. The participants included 242 companies based in Germany, including 77% of the DAX companies and 54% of the MDAX companies.

You can download the study here.