Determining the current cost of capital


The cost of capital is the weighted average of the required rates of return on equity and debt. The cost of equity is determined using the Capital Asset Pricing Model (CAPM).

This model uses the yield on long-term risk-free Bunds, increased by the risk premium attaching to investments in the equity market. The general risk premium, which reflects the general risk of a capital investment in the equity market and focuses on the DAX, is 5%. Allowance is made for the individual risk to which Volkswagen’s shares are exposed using a beta factor that reflects the fluctuations in the price of Volkswagen shares in comparison with the DAX.

As Volkswagen shares experienced considerable price fluctuations in 2008 and 2009, leading to extreme beta factors in individual months, a multi-year average figure of 0.87 was used to determine the current beta factor for 2009 as a whole, as was the case in 2008.

The cost of debt is based on the average yield for long-term debt. As borrowing costs are tax-deductible, the cost of debt is also adjusted to account for the tax rate of 30%.

A weighting on the basis of a fixed ratio for the fair values of equity and debt gives an effective cost of capital for the Automotive Division of 6.9% (7.2%) for 2009.

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COST OF CAPITAL AFTER TAX AUTOMOTIVE DIVISION

 

 

%

 

2009

 

2008

Risk-free rate

 

4.1

 

4.1

DAX market risk premium

 

5.0

 

5.0

Volkswagen-specific risk premium

 

–0.7

 

–0.6

(Volkswagen beta factor)

 

(0.87)

 

(0.89)

Cost of equity after tax

 

8.4

 

8.5

Cost of debt

 

5.5

 

6.7

Tax

 

–1.6

 

–2.0

Cost of debt after tax

 

3.9

 

4.7

Proportion of equity

 

66.7

 

66.7

Proportion of debt

 

33.3

 

33.3

Cost of capital after tax

 

6.9

 

7.2

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