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).
