Why does the IDW S1 Ertragswertverfahren discount flows to equity holders directly, and how does the Tax-CAPM differ from a standard CAPM cost of equity?
An advanced Valuation question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
IDW S1 uses an equity-side (Ertragswert) approach: it discounts the net cash flows distributable to owners at a cost of equity, rather than free cash flow at WACC, reflecting German practice of valuing the equity claim directly. The cost of equity uses a Tax-CAPM (Tax-CAPM nach FAUB), which explicitly models personal taxes — German investors are taxed differently on dividends, capital gains and interest, so the standard pre-personal-tax CAPM understates the required return. The Tax-CAPM grosses up the base rate and market risk premium for typified personal taxation (Typisierung). FAUB publishes the recommended MRP and the approach to the Basiszins derived from the yield curve.
WHAT INTERVIEWERS LISTEN FOR
- ✓Equity-side Ertragswert vs WACC/FCF
- ✓Tax-CAPM incorporates typified personal taxes
- ✓German dividend/gains/interest taxation differs
- ✓FAUB sets MRP and Basiszins methodology
COMMON MISTAKES
- ✗Confusing Ertragswert with entity-side DCF
- ✗Ignoring personal-tax adjustment
- ✗Not knowing FAUB's role
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RELATED QUESTIONS
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- How do you handle non-betriebsnotwendiges Vermögen (non-operating assets)?
- What is the Wachstumsabschlag in the IDW S1 terminal value, and why is it often below the inflation rate?