KPMG Cost of Capital Study - KPMG Germany

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Discover in our 2024 study the impact that expectations of interest rate cuts can have on the development of growth and the cost of capital.

The New Dilemma: Balancing Interest Rates and Growth

~300

Companies

+220

German Companies

75%

DAX 40 companies

3

Key topics

Trends in 2024 | Cost of capital parameters 2024 | Impairment Test | Download | Contact persons

This is the Cost of Capital Study

The KPMG Cost of Capital Study is an annual empirical survey that provides insights into how current economic developments affect the business models, corporate development and long-term return expectations (cost of capital) of companies in the DACH region (Germany, Austria and Switzerland). The annual extensive reach of the KPMG Cost of Capital Study underlines the great practical benefit that this study offers for companies.

Current topics and trends

The 19th edition of the Cost of Capital Study is entitled “The New Dilemma: Balancing Interest Rates and Growth”. The study examines the impact of a persistently uncertain market environment on the interplay between interest rate developments and growth expectations, as well as the resulting effects on business models, corporate developments and long-term return expectations (cost of capital) by sector-specific analyses.

Trends for 2024

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A man sitting on mountain top

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Results of the 2024 cost of capital study

In the survey period, the participating companies applied a weighted average cost of capital (WACC) of between 5.3 percent and 10.0 percent. The average WACC across all sectors amounted to 8.3 percent, which represents a slight increase compared to the previous year (7.9 percent). Comparatively high WACCs were recorded on average in the Automotive (9.3 percent) and Industrial Manufacturing (9.0 percent) sectors, while both the Energy & Natural Resources as well as the Real Estate sectors reported the lowest average WACCs (6.6 percent each).

You can find more details in the current study.

During the survey period, the levered beta factors of all participating companies ranged from 0.74 to 1.40, with an average of 1.06 (previous year: 1.02). The highest average levered beta factors were observed in the Automotive (1.25), Technology (1.21) and Industrial Manufacturing (1.16) sectors. In comparison, companies in the Healthcare (0.92), Media & Telecommunications (0.93), and Energy & Natural Resources (0.94) sectors applied the lowest average levered beta factors.

You can find more details in the current study.

The average risk-free rate applied by German and Austrian participating companies amounted to 2.6 percent (previous year: 1.9 percent). In Switzerland, the average risk-free rate used remained constant at 1.8 percent.

The average market risk premium applied by the participating companies declined by 0.4 percentage points in Germany and by 0.5 percentage points in Austria to 6.7 percent in both countries. In Switzerland, the market risk premium increased by 0.3 percentage points compared to the previous year, reaching 6.2 percent.

This resulted in an average expected total return in the survey period of 9.3 percent in Germany and Austria and 8.0 percent in Switzerland.

You can find more details in the current study.

During the survey period, the levered cost of equity applied by the participating companies ranged from 6.6 percent to 12.4 percent, with an average of 9.8 percent across all sectors (previous year: 9.4 percent). The highest average levered cost of equity was observed by companies within the Automotive sector (11.5 percent), whereas the lowest was applied by companies in the Real Estate sector (8.8 percent).

You can find more details in the current study.

The cost of debt of the participating companies ranges from 3.5 percent to 5.8 percent across all sectors. On average, the applied cost of debt amounted to 4.4 percent, which represents an increase of 0.6 percentage points compared to the previous year.

The Consumer Markets as well as the Technology sector recorded the highest average cost of debt (4.9 percent each), while participating companies in the Energy & Natural Resources sector reported the lowest average cost of debt (4.0 percent).

You can find more details in the current study.

The debt ratios stated by the participating companies vary significantly by sector, resulting in a range of 1.0 percent to 60.0 percent. The average debt ratio across all sectors is 27.6 percent (previous year: 26.6 percent). The highest average debt ratios can be observed by participating companies in the Energy & Natural Resources sector (43.9 percent), while the lowest average debt ratios were applied by participating companies in the Technology sector (15.0 percent). The high debt ratio in the Energy & Natural Resources sector can most likely be explained by the sector's high investment requirements.

You can find more details in the current study.

Impairment Test

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Around half of the participating companies stated that they had recognized an impairment – goodwill and/or asset – during the survey period. Asset impairments were significantly more common than goodwill impairments. Most impairments were carried out by companies in the Consumer Markets sector. In comparison, participating companies within the Automotive sector have recognised the fewest impairments.

According to IFRS, an annual goodwill impairment test is conducted as part of the financial statements. Additionally, during the survey period, about 40 percent of participants conducted an impairment test due to a triggering event. The causes for a triggering event are shown in the graph above.

The underlying causes of the triggering event for an impairment test vary significantly among the participating companies and depend on the respective industry. Across all sectors, companies most frequently cite lower long-term expectations and other factors as the main reasons for a triggering event.

Further Issues of the Cost of Capital Study

Key topics of the study:

Growing divergence? Hypotheses on the different development of global economic areas
Inflation unleashed? The interaction of central banks with the capital markets
Navigating increasing uncertainty? Development of return expectations in turbulent times

Key topics of the study:

How should inflation be taken into account in the valuation calculation?
What specific challenges arise from the current developments in inflation rates and expected returns for the energy sector?
How do the rising inflation rates observed on the market affect investors' return expectations?

Key topics of the study:

What are important changes in ESG reporting?
How do ESG requirements affect valuations in the consumer market?
How can good decisions be made in the ESG environment?

Further interesting Insights for you

Your contact persons

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Heike Snellen

Heike Snellen

Director, Deal Advisory, Valuation

KPMG AG Wirtschaftsprüfungsgesellschaft

+49 211 475-7062

+49 211 475-7062

Andreas Tschöpel

Dr. Andreas Tschöpel

Partner, Deal Advisory, Valuation

KPMG AG Wirtschaftsprüfungsgesellschaft

+49 30 2068-1488

+49 30 2068-1488

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What do the cost of capital parameters show?

The weighted average cost of capital (WACC) is the average rate of return required by all investors and is calculated as a weighted average of the cost of equity and debt, where the weights are the respective proportions of the market values of equity and debt in the total company value. The WACC represents the return from an alternative investment appropriate for investing in the company being valued.

The beta factor measures how much an individual security fluctuates in comparison to the market portfolio. It represents the valuation-relevant, company-specific risk measure.

The beta factor is a crucial component in determining the cost of equity. According to the capital asset pricing model, the required return is composed of the risk-free rate and the risk premium, the latter being the product of the general market risk premium and the company-specific beta factor.

The market risk premium represents the return required by an investor for holding a market portfolio above the risk-free rate. It is a part of the investor's required total return, which is explained using capital market pricing models. The capital market-oriented market risk premium can be determined by calculating the differential return between investments in a representative market portfolio – consisting of risky company shares (stocks) – and risk-free investments. It can be based on both historical and forward-looking data. Thus, the market risk premium is not a parameter that can be directly observed on the capital market.

The cost of equity for a company represents the return that equity investors – investors or shareholders – expect for their investment in the company. To derive the cost of equity, empirically observable capital market returns for corporate investments in the form of stock portfolios are particularly relevant. These returns compensate overall for the current consumption foregone by shareholders and future monetary depreciation, as well as the assumption of entrepreneurial risks, since an investment in companies and corporate shares is characterised by uncertainties. Therefore, the total return can fundamentally be divided into a return component for the compensation of the temporal provision of capital – known as the “risk-free rate” – and a risk premium demanded by shareholders due to the assumption of entrepreneurial risk.

The cost of debt refers to the return demanded by debt holders.

The debt ratio is calculated as the ratio of the market value of (net) debt (interest-bearing assets and liabilities) to the market value of total capital.

The total return of the capital market is derived from empirically determined stock returns – both historical and forward-looking – for the representative market portfolio. Using capital market pricing models such as the capital asset pricing model, the total return can be explained and divided into individual components: the risk-free rate and the market risk premium.