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Based on results of our recent reseach, we present recommendations on inputs for cost of equity estimation. 

The following pages present:

Equity Risk Premium

We recommend the use of an equity risk premium in Europe (“ERP”) of 7.5% (updated as of 31 March 2022).

 

We have based this recommendation on results of our internal model as well as on other financial indicators. Due to recent increasing global geographical and financial uncertainties and increasing inflation, we increase the recommendation of equity risk premium in the first quarter of 2022.

Please note that the ERP shall be accompanied by appropriate risk-free rate, beta and size and country risk premium. Further guidance is provided below.

Size Premium

Based on our research and the financial data available in Europe, we observe a clear pattern that size premium in Europe exists, thus we recommend to use the size premium. The size premium presented below is consistent with the equity risk premium recommendation.

Quartile 1

Quartile 2

Quartile 3

Quartile 4

0%

0.5%

1.0%

2.0%

Market capitalization > 10 000 EUR mil

Market capitalization <= 10 000 EUR mil and > 3 000 EUR mil

Market capitalization <= 3 000 EUR mil and > 1 000 EUR mil

Market capitalization <= 1 000 EUR mil

Country Risk Premium

Based on our research and the financial data available in Europe, we observe a clear differences in European regions, thus we recommend to use the country risk premium. The coutnry risk premium presented below is consistent with the equity risk premium recommendation.

Region 1
 

Region 2

 

Region 3
 

0%
 

0.5%

 

1.0%
 

Denmark, Germany, Luxembourg, Netherlands, Norway, Sweden, Switzerland

Austria, Belgium, Czech Republic, Estonia, Finland, France, Ireland, Island, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, United Kingdom

Bulgaria, Croatia, Cyprus, Greece, Hungary, Italy, Portugal, Romania, Spain

Cost of Equity Calculation

The most commonly used appraoch of cost of equity calculation is based on the Capital Asset Pricing Model (CAPM).

 

Use of the equity risk premium, size premium and country premium recommended above is consistent with using a spot risk-free rate (e.g. 10Y government bond in local currency) and beta derived using stock returns of a given company and index return of STOXX 600

Cost of Equity = Risk-free Rate
                             + Beta * Equity Risk Premium
                             + Size Premium
                             + Country Risk Premium

Historical Data

Historical recommendations of equity risk premium, size premium and country risk premium are contained in the data archive. 

 
 

2021

2022