Beta factors

The cost of capital is the interest rate used to discount the cash flows relevant to the valuation. The determination of the cost of capital is thus an essential component of business valuations. For the determination of cost of capital, the valuation standard IDW S1 explicitly refers to the capital market-based Capital Asset Pricing Model (CAPM or Tax-CAPM), according to which the cost of equity can basically be broken down into a base interest rate, a beta factor and a market risk premium. The beta represents the company-specific risk and measures the price fluctuation of the individual value (the individual value risk) in relation to the market (market risk).

The beta factor is determined on the basis of a linear regression of returns. In practice, a valuer is regularly faced with a challenge in this process: in the case of unlisted companies, the derivation must be made via the returns of suitable listed comparable companies (peer group).

In the context of “unlevering” and “relevering”, an adjustment to the specific financing risk of the company to be valued is also necessary. The selection of peer group companies and an improper calculation of the beta regularly become a point of discussion in the context of legal disputes. We determine peer groups, beta factors and cost of capital for your company valuation on an order-related basis and, upon request, prepare a corresponding report section for your expert opinion. If you have any questions, please do not hesitate to contact us.
Phone: +49 (30) 20 39 57 0 – Mail: beta@wollnywp.de

Calculation of beta factor