Updated Cost of Capital Recommendation by the FAUB
The Fachausschuss für Unternehmensbewertung und Betriebswirtschaft (FAUB) of the IDW has published an adjusted cost of capital recommendation. The update was necessary because the yield curve derived using the Svensson method (based on the Bundesbank methodology, German government bonds) results in negative yields for (almost) the entire term of 30 year. The estimated value for the risk-free interest rate derived on this basis for company valuation purposes is thus virtually zero for the first time.
Against this background, the FAUB decided to raise its recommendation for the market risk premium before personal taxes from 5,50 – 7,00 % to 6,00 – 8,00 % at its meeting on October 22, 2019. Thus, the FAUB tends to focus on the lower end of the observable overall returns and would like to take account of the possibility that these could continue to fall slightly over time.
You will find the complete FAUB statement on the IDW homepage.