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The 17th edition of the Cost of Capital Study focuses on the motto “Inflation at record high  - what's in for company valuations? Among other things, it examines the influence of rising inflation rates on business models, corporate developments and on long-term return expectations (cost of capital) based on sector specific analyses.

Homogenous development of weighted average cost of capital

After the weighted average cost of capital (WACC) remained unchanged at 6.6 percent across all industries last year, it increased to 6.8 percent in the survey period (June 30, 2021 to April 30, 2022). This increase is also reflected in the development of the individual industries. More than half of the industries reported an increase in the WACC.

As in the previous year, the highest WACC was observed in the Technology (8.0 percent), Automotive (7.6 percent) and Industrial Manufacturing (7.4 percent) sectors and thus continues to concern industries where regulatory and political risks as well as technology-related changes fundamentally impact business models.

Compared to the previous year, the most significant increase in the WACC was observed in the Transport & Leisure (+0.9 percentage points) and Consumer Markets (+0.6 percentage points) sectors. Coming from a high level, the strongest decline in the WACC was recorded in the Technology sector (-0.9 percentage points).

In the meantime, the risk-free rate has increased significantly after years of extremely low interest rates. However, higher uncertainty and a strong increase in inflation have led to an increase in expected returns, so that no decline in the market risk premium has been observed so far.

ESG remains a relevant topic for business development

Compared to the previous year, the relevance of ESG issues (environmental, social, governance) for future business development has further increased among the study participants. As in the previous year, the importance attributed to ESG varies from industry to industry. In particular, resource-intensive industries and those where environmental issues play a key role are more sensitive to challenges posed by ESG-related factors. Compared to the previous year, the relevance of ESG issues increased most in the Media & Telecommunications sector. The sharpest decline was reported by the Chemicals & Pharmaceuticals sector.

Discussions concerning the correct consideration of price increases

For several weeks and months already, particularly dynamic developments can be observed on capital markets. Strongly rising inflation rates play a key role in this context. For this reason, the Cost of Capital Study 2022 focuses on the motto "Inflation at record high  - what's in for company valuations?" The survey period does not yet reflect the latest developments regarding the increase in inflation rates. However, causes and effects are addressed in particular by the evaluation of the individual cost of capital parameters as well as the following subjects:

  • How to incorporate inflation in valuation models?
  • What challenges does the current development of inflation rates and cost of capital pose for the energy sector?
  • How do the rising inflation rates observed in the market affect investors' return expectations?

The majority of the study participants agree that in the next two years, (company-specific) inflation rates will be significantly above the European Central Bank's medium-term (consumption-oriented) inflation target of 2.0 percent. The main reasons cited for this are supply chain disruptions, higher energy prices, raw material shortages and geopolitical crises such as the Russia-Ukraine war. The extent to which inflation-related cost increases can be passed on to customers strongly depends on their price sensitivity and varies greatly from industry to industry. 

Assessments from more than 320 companies

In total, 321 companies participated in this year's cost of capital study. Of the participants, 239 are based in Germany, including 73 percent of the DAX-40 companies and 45 percent of the MDAX companies. The response rate of companies underlines the practical relevance of our annual Cost of Capital Study.

You can download the study here.