Implied Cost of Capital: Pros and Cons

Transcription

1 Implied Cost of Capital: Pros and Cons Prof. Dr. Dr. h.c. Wolfgang Ballwieser Ludwig-Maximilians-University Munich 2nd Annual Conference of IACVA Germany - 1 October 2008

2 Outline 1. Motivation 2. Procedure 3. Empirical Results 4. Evaluation W. Ballwieser Implied Cost of Capital 1 October

3 1. Motivation Business valuation is based on market data and calculation of present value Cash flows are to be projected Discount rate should also be forward looking Application of CAPM is often based on historical data to estimate Beta and EMRP Why not using expectations of market participants? W. Ballwieser Implied Cost of Capital 1 October

4 1. Motivation Not a new idea - Gordon/Shapiro (1956), Malkiel (1979) But revitalized - Claus/Thomas (2001) - Gebhardt/Lee/Swaminathan (2001) - Easton/Taylor/Shroff/Sougiannis (2002) - Ohlson/Jüttner-Nauroth (2003) - Daske/Gebhardt/Klein (2006) Results of this paper Reese (2007) => Empirical data - Ballwieser (2005) => Conceptional evaluation Different approach - Rausch (2008) W. Ballwieser Implied Cost of Capital 1 October

5 2. Procedure Financial analysts earnings forecasts Stock price as proportional business value Model based extension of earnings projections using valuation models Within DDM, assumption of payout ratio Cost of equity equals internal rate of return of cash flows W. Ballwieser Implied Cost of Capital 1 October

6 Valuation Models clean-surplus-relation b = b + eps d t t 1 t t Div.-Discount Method Stock Price P as present value of expected dividends: P 0 = t= dt 1 (1 + r) t = Residual Income Method Stock Price P as present value of expected residual earnings plus book value of equity (both per share): P = b t= epst rb 1 (1 + r) t 1 t W. Ballwieser Implied Cost of Capital 1 October

7 Valuation Models Operationalisation of the Residual Income Model I/B/E/S-Analysts Forecasts P eps r b ( eps rb )(1 + g) 5 t t = b0 + + t 5 t= 1 (1 + r) ( r g)(1 + r) Stock price, book value Ad hoc-assumption or simultaneous estimation Implied cost of capital as internal rate of return W. Ballwieser Implied Cost of Capital 1 October

8 Valuation Models Residual Income Method with a five years detailed planning period P = b t= eps r b 1 (1 ) t CT t 1 t + rct Phase 1: 5 years (detailed planning period) + ( eps5 rctb4)(1 + g) 5 ( r g)(1 + r ) CT CT Phase 2: from year 6 ongoing (perpetuity assumption) Approximation of growth rate by inflation rate W. Ballwieser Implied Cost of Capital 1 October

9 Valuation Models Persistence of Residual Earnings Assumption of Convergence ROE competition pressure t, long term industry average investors pressure Plausibility checks limit the range of growth rates! W. Ballwieser Implied Cost of Capital 1 October

10 Valuation Models Residual Earnings Model with three phases P = b t= 1 ( ROE r ) b (1 ) t GLS t 1 t + rgls Phase 1: 5 years (detailed planning period) + 11 t= 6 ( ROE r ) b (1 ) t GLS t 1 t + rgls Phase 2: 6 years (convergence phase) + ( ROE r ) b r 12 GLS GLS (1 + rgls ) Phase 3: from year 12 ongoing (perpetuity assumption) Assumption of Convergence during phase 2: Convergence of ROE towards average industry ROE W. Ballwieser Implied Cost of Capital 1 October

11 Valuation Models Ohlson/Jüttner-Nauroth (2003) Independency of clean-surplus-relation Price-Earnings-(Growth)-Ratio (PE-/PEG-Ratio) P 0 eps eps2 eps1 rojn ( eps1 dps1) r r ( r g ) 1 = + OJN OJN OJN p eps = rojn A A g P0 with 1 dps A = + 2 P0 1 ( γ 1) ( 2 ( γ 1) ) g 2 = eps eps eps LTG γ-1 = long term growth rate W. Ballwieser Implied Cost of Capital 1 October

12 3. Empirical Results (Reese 2007) German listed companies between 1987 and 2004 Constant increase from 82 companies in 1989 to 332 companies in 2002, decrease to 214 in 2004 Estimation of implied cost of equity on a monthly base (N = ) Different minimum standards on availability of data Resources: IBES: Earnings forecasts and industry classification Worldscope/Datastream: Stock prices, accounting data W. Ballwieser Implied Cost of Capital 1 October

13 Implied equity market risk premiums between 1987 and 2004 (Reese 2007, p. 101) Jahr rp CT rp GLS rp OJN rp PEG REX ANZAHL MV N Mittel N Mittel N Mittel N Mittel Mittel Median Mittel Median ,09% 613 1,04% 524 3,43% 588 0,79% 6,89% 14,3 14, ,69% 719-1,36% 589 1,86% 679-1,48% 8,61% 15,3 15, ,28% ,78% 939 2,08% ,04% 8,38% 14,0 14, ,81% ,37% 982 2,96% ,39% 7,77% 17,6 16, ,17% ,36% 916 3,28% ,63% 6,51% 19,6 18, ,53% ,77% 987 3,86% ,88% 6,97% 21,1 20, ,66% ,80% ,80% ,00% 6,82% 21,0 19, ,80% ,07% 914 5,17% ,16% 6,24% 19,4 18, ,36% ,74% ,84% ,28% 5,68% 18,5 17, ,43% ,32% ,98% ,89% 4,57% 15,7 12, ,70% ,77% ,49% ,97% 4,57% 12,3 7, % ,57% 6.16% ,31% 8.33% 839 6,15% % 7,58% 5,31% 9,8 5, ,74% ,83% 857 8,62% ,91% 4,88% 9,5 5, ,06% ,53% ,01% ,59% 4,82% 11,1 6, ,57% ,44% ,12% ,07% 4,13% 11,5 7, ,57% ,16% ,33% ,97% 4,08% 10,5 6, Total ,56% ,83% ,50% ,47% 6,01% 15,1 12, W. Ballwieser Implied Cost of Capital 1 October

14 0,23 0,18 EMRP 0,13 0,08 0,03-0, rp CT rp GLS rp OJN rp PEG Year Source: Reese 2007, p. 102 W. Ballwieser Implied Cost of Capital 1 October

15 Implied equity market risk premiums according to industries (Reese 2007, p. 103) Branche rp CT rp GLS rp OJN rp PEG Mittel Median Mittel Median Mittel Median Mittel Median Public Utilities 2,7% 1,7% 1,7% 0,8% 3,6% 3,1% 3,0% 1,4% Transportation 3,2% 3,4% 2,2% 1,6% 6,8% 6,3% 7,1% 5,8% Consumer-Non-Durables 3,9% 3,2% 2.7% 3,4% 3,0% 5,0% 4,7% 4,9% 3,7% Finance 4,2% 2,6% 2,6% 1,6% 4,8% 3,8% 5,9% 2,4% Basic Industries 4,4% 4,0% 3,7% 3,3% 5,9% 5,5% 5,5% 4,6% Health Care 4,6% 2,5% 5,0% 3,5% 5,3% 4,0% 8,2% 3,4% Capital Goods 5,2% 3,7% 5,0% 4,4% 6,0% 4,8% 7,8% 5,3% Consumer Durables 6,2% 5,3% 6,3% 5,9% 6,8% 5,8% 8,1% 6,2% Consumer Services 6,9% 3,5% 9.3% 6,0% 3,8% 7,1% 5,1% 10,8% 5,5% Energy 7,4% 6,8% 10,2% 10,5% 10,6% 10,4% 10,3% 7,6% Technology 9,3% 5,4% 11,5% 9,6% 8,0% 7,0% 19,0% 11,2% Total 5,5% 3,5% 5,2% 3,9% 5,8% 4,7% 8,7% 4,9% W. Ballwieser Implied Cost of Capital 1 October

16 Personal income tax (old system) Cash flows after personal income tax Dividends are taxed with 17.5 % Capital gains tax free Average payout ratio of listed companies Different growth assumptions Result: Cost of equity after personal income tax P ( ) ( ) eps p (1 t ) eps p (1 t ) + eps 1 p r r r g 3 t d 4 d 4 0 = + t 3 t= 1 (1 + NS ) (1 + NS ) NS W. Ballwieser Implied Cost of Capital 1 October

17 Results (Reese 2007, p. 126) Jahr Eigenkapitalkosten REX Marktrisikoprämie vor Steuern nach Steuern vor Steuern nach Steuern Wachstumsrate 0% ,74% 8,19% 4,96% 3,78% 4,97% ,52% 8,02% 3,72% 4,80% 5,60% ,29% 7,75% 4,37% 3,92% 4,91% Wachstumsrate 1% ,57% 9,03% 4,96% 4,60% 5,80% ,35% 8,86% 3,72% 5,63% 6,44% ,12% 8,60% 4,37% 4,75% 5,76% Wachstumsrate 2% ,40% 9,87% 4,96% 5,44% 6,65% % 10,19% 8.60% 9,70% 3,72% 4.75% 6,47% 5.76% 7,28% ,96% 9,44% 4,37% 5,59% 6,60% W. Ballwieser Implied Cost of Capital 1 October

18 Historical vs. Implied EMRP CDAX (arithm. average) MRP before personal income tax 5.46 % (12.40 % %) MRP after personal income tax 6.66 % (11.16 % %) CDAX (geom. average) 2.66 % (9.50 % %) 3.83 % (8.24 % %) Implied (2004 / g = 1%) 4.75 % (9.12 % %) 5.76 % (8.60 % %) W. Ballwieser Implied Cost of Capital 1 October

19 4. Evaluation Pros Conceptual forward looking perspective Calculability on each trading day of stock exchange Cons High dependency of the valuation model Biased earnings forecasts Value additivity Circularity problem W. Ballwieser Implied Cost of Capital 1 October

20 Literature Ballwieser, Wolfgang (2007), Unternehmensbewertung Prozeß, Methoden und Probleme, 2. ed., Stuttgart. Ballwieser, Wolfgang (2005), Die Ermittlung impliziter Eigenkapitalkosten aus Gewinnschätzungen und Aktienkursen: Ansatz und Probleme, in: Schneider, Dieter et al. (eds.), Kritisches zu Rechnungslegung und Unternehmensbesteuerung, Festschrift Siegel, Berlin, p Ballwieser, Wolfgang/Reese, Raimo/Wiese, Jörg (2007), Aktuelle Entwicklungen der Unternehmensbewertung: Steuerreform, Kapitalkosten, Endwert, Fakultätstag BWL 16. Juni 2007, München. Claus, James/Thomas, Jacob (2001), Equity Premia as Low as Three Percent?, Evidence from Analysts Earnings Forecasts for Domestic and International Stock Markets, in: JoF, vol. 56, p Daske, Holger/Gebhardt, Günther/Klein, Stefan (2006), Estimating the Expected Cost fo Equity Capital Using Analysts Consensus Forecasts, in: sbr, vol. 58, p W. Ballwieser Implied Cost of Capital 1 October

21 Literatur Easton, Peter/Taylor, Gary/Shroff, Pervin/Sougiannis, Theodore (2002), Using Forecasts of Earnings to Simultaneously Estimate Growth and the Rate of Return on Equity Investment, in: JAR, vol. 40, p Gebhardt, William R./Lee, Charles M./Swaminathan, Bhaskaran (2001), Toward an Implied Cost of Capital, in: JAR, vol. 39, p Gordon, Myron J./Shapiro, Eli (1956), Capital Equipment Analysis: The Required Rate of Profit, in: MS, vol. 3, p Malkiel, Burton G. (1979, The Capital Formation Problem in the United States, in: JoF, vol. 34, p Ohlson, James A./Jüttner-Nauroth, Beate (2005), Expected EPS and EPS Growth as Determinants of Value, in: RAS, vol. 10, p Rausch, Benjamin (2008), Unternehmensbewertung mit zukunftsorientierten Eigenkapitalkosten Möglichkeiten und Grenzen der Schätzung von Eigenkapitalkostensätzen ohne Verwendung historischer Renditen, Wiesbaden. Reese, Raimo (2007), Schätzung von Eigenkapitalkosten für die Unternehmensbewertung, Frankfurt am Main. Stehle, Richard (2004), Die Festlegung der Risikoprämie von Aktien im Rahmen der Schätzung des Wertes von börsennotierten Kapitalgesellschaften, in: WPg, vol. 57, p W. Ballwieser Implied Cost of Capital 1 October