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Determination of weighted average cost of capital (WACC)

The capital costs calculated for your company serve as a reliable foundation for financial planning, investment strategy, business valuation, and accounting matters within the framework of international financial reporting standards.
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Reliable capital costs to assess risks

Diversity of methods

Our selection of methods enables a reliable calculation of capital costs, which is individually tailored to the needs of your project.

Documentation

Detailed documentation of the determined capital costs is of central importance for the transparency and traceability of your investment decision. We disclose all underlying assumptions and data sources used in a complete and comprehensible manner.

Many years of expertise

Benefit from our accumulated experience from a wide range of different projects.

Capital costs

With reliably determined capital costs, your investments are based on solid foundations.

Estimation using approved methods, enriched with approaches from recent capital market research.
Consideration of an adequate “peer group”
Calculation using reliable and verified data sources.

Capital costs for your project

The determination of the WACC is an essential part of company valuation and financial planning.

Evaluation of investment projects

WACCs represent the expected returns of equity and debt investors for the capital they provide. The estimated WACC provide an accepted measure to assess the profitability of investment projects.

Business valuation

WACC play a central role in valuing a company, particularly when using discounted cash flow models (DCF). The WACC represent the appropriate rate of interest to discount future cash flows to reveal their present value.

Optimizing the capital structure

The WACC serve as an essential measure to identify the optimal mix of equity and debt capital. They enable companies to minimize total capital costs by taking into account the respective financing costs and risks of the individual sources of capital.

How we determine capital costs

Cost of equity
Cost of debt
Weighting

Cost of Equity

We use both, well established methodologies (e.g. capital asset pricing model) and more contemporary approaches (e.g. present value models based on the dividend discount model) to estimate the required return for equity investors based on the associated risk profile.

Cost of debt

The cost of debt is determined, for instance, by referencing yield curves to identify prevailing market interest rates for the relevant maturities. These rates are subsequently adjusted to account for specific risk premiums and tax effects, ensuring an accurate reflection of the borrowed capital's effective.

Weighting

The cost of equity and the cost of debt are weighted proportionally to calculate the WACC, which represents the average rate of return required by all capital providers.

FAQ

Feel free to contact us if you have any further questions.
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What are capital costs?

Capital costs refer to rate of interest, which investors are expected to charge for providing financial resources. They reflect the opportunity costs of equity and debt capital used and serve as a central reference figure in investment decisions and company valuations.

What is the Weighted Average Cost of Capital (WACC)?

The WACC describes the average cost of capital of a company, weighted according to the share of equity and debt capital in the capital structure.

How is the cost of debt determined?

The cost of debt (borrowing cost) comprise the interest a company pays on borrowed capital less the tax advantage, as interest is tax deductible (“tax shield”). If the cost of debt is not directly observable, the appropriate yield curve may be used.

How is the cost of equity determined???

The Capital Asset Pricing Model (CAPM) is often used to determine the cost of equity. This model consists of the risk-free interest rate, the market risk premium and the company-specific beta factor, which measures the systematic risk.

Formula:
Equity costs = risk-free interest rate + beta factor × market risk premium

What does the Capital Asset Pricing Model (CAPM) describe?

The CAPM is a financial model used to determine the cost of equity. It describes the relationship between a security’s expected return and its systematic risk relative to the overall market. CAPM is widely applied in business valuation practices due to its theoretical foundation and practical relevance.

What does the beta factor describe?

The beta factor quantifies the sensitivity of a security’s return in relation to the return of the overall market. A beta greater than 1 indicates above-average volatility and, consequently, higher systematic risk, while a beta below 1 suggests lower volatility and reduced exposure to market movements.

What is the market risk premium?

The market risk premium corresponds to the expected additional return of an investment in the stock market compared to a risk-free investment. It is a central part of the calculation of equity costs within the framework of CAPM.

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