Insights: Capital Costs

Valuation issues in practice

The calculation of the cost of capital plays a central role in the valuation of companies and investment decisions, as well as in tax law and (international) accounting. In this topic special you will get a comprehensive insight into the latest developments and practical issues in this area.

The articles cover not only the traditional determination of the cost of equity and debt capital, but also innovative aspects such as the integration of environmental, social and governance (ESG) aspects into the determination of the cost of capital. These issues are becoming increasingly relevant, particularly in light of the growing importance of sustainable business practices.

Special attention is given to the challenges of determining the cost of capital in times of rising inflation. It analyzes the potential impact of higher inflation on the calculation of the cost of capital and provides practical recommendations for companies. In addition, the volatile financial environment is discussed in detail and the measurement of the implied market risk premium (iMRP) in times of crisis and volatile equity markets is examined.

Specific issues such as the calculation of the cost of capital in the context of international accounting, the valuation of start-ups, and the impact of leverage on the cost of capital are also covered. Special attention is given to the new IDW Valuation Note, which sheds new light on the role of debt and thus influences valuation practice.

Determining cost of debt vs. borrowing rates

The cost of debt is commonly and broadly equated with the interest rate on debt instruments plus the fees charged by banks. However, in the case of a company valuation, which rests on the foundations of capital market theory, contractual interest rates are only the first point of reference for determining the actual cost of debt. Read more »

Incorporating ESG into the cost of equity and debt in a company valuation

ESG factors are becoming increasingly important due to growing regulatory requirements, changing customer, investor and employee preferences, and the growing demand for their consideration in corporate valuation. Read more »

Impact of higher inflation on cost of capital

Inflation has a complex impact on the valuation of companies. The cost of capital is made up of several parameters that react individually to inflation. It is important to understand the impact on each parameter and to treat them with the utmost care in order to get a clear picture of the overall impact on the company's valuation. Read more »

Measuring the implied market risk premium (iMRP) in times of crisis and volatile equity markets

The market risk premium is one of the inputs to the Capital Asset Pricing Model (CAPM) used to determine the cost of equity. It represents the return that an investor expects to receive for assuming risk in addition to the return on a risk-free investment. Read more »

Determining the Cost of Capital in the Context of International Accounting

A key component of purchase price allocation and impairment testing is the calculation of the cost of capital. The weighted average cost of capital (WACC) is regularly used for this purpose. WACC is derived from the weighted cost of equity, which consists of a risk-free interest rate. Read more »

Determining cost of capital when valuing start-ups

Start-up companies often differ from mature companies in terms of their risk profile. In order to derive discount rates for valuations, risk adjustments to the classical cost of capital according to the Capital Asset Pricing Model (CAPM). Read more »

The Impact of Debt on the Cost of Capital: The New IDW Valuation Note

As part of the ongoing changes in business valuation practice, the Institute of Public Auditors in Germany (IDW) published the valuation note “Consideration of the level of indebtedness in the valuation of companies” on 6 September 2023, thus updating the analogous practice note of 12 September 2018. Read more »

Cost of Capital in Business Valuation – Comparison of Standards in the DACH Region

In the German IDW S1, the Austrian KFS/BW 1 and the Swiss Technical Note "Business Valuation", the calculation of the cost of capital in business valuations differs considerably in some cases. Read more »