Corporate Finance: Instructor\'s Manual Applied Corporate Finance

(Amelia) #1
Aswath Damodaran 152

Estimating Bottom-up Beta: Deutsche Bank


! Deutsche Bank is in two different segments of business - commercial banking
and investment banking.


  • To estimate its commercial banking beta, we will use the average beta of
    commercial banks in Germany.

  • To estimate the investment banking beta, we will use the average bet of investment
    banks in the U.S and U.K.
    ! To estimate the cost of equity in Euros, we will use the German 10 - year bond
    rate of 4. 05 % as the riskfree rate and the US historical risk premium ( 4. 82 %)
    as our proxy for a mature market premium.
    Business Beta Cost of Equity Weights
    Commercial Banking 0. 7345 7. 59 % 69. 03 %
    Investment Banking 1. 5167 11. 36 % 30. 97 %
    Deutsche Bank 8. 76 %


Same process for Deutsche Bank. The only difference is that leverage is ignored


because it is a financial service firm. It is implicitly assumed that banks tend to


have similar leverage.


We use the German 10-year bond rate, not because Deutsche is a German


company, but because the German 10-year Euro bond had the lowest interest


rate of all European 10-year bonds (and thus most likely to be default free).

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