- TovalueSAP,wewillbeginwiththeestimatesfor
the five-year high-growth period. We use a
bottom-up beta estimate of 1.26, and the euro
risk-free rate of 3.41%, and a mature market risk
premiumof4%.Inaddition,SAPgetsabout10%of
itsrevenuesfromemergingmarketsinAsiaandLatin
America (estimated risk premium = 6.5%). The
compositemarketriskpremiumthatweuseforSAP
reflects this exposure:
WeestimateasyntheticratingofAAAforSAP,and
useittocomeupwithapretaxcostofborrowingof
3.76%by addinga defaultspread of 0.35%to the
risk-freerateof3.41%.Withamarginaltaxrateof
36.54%andadebtratioof1.41%,thefirm’scostof
capital closely tracks its cost of equity.
Toestimatetheexpectedgrowthrateforthefirstfive
years,wewillassumethatthefirmcanmaintainits
current return on capital and reinvestment rate
estimated earlier.
- Beforeweconsiderthetransitionperiod,weestimate
the inputs for the stable-growth period. First, we
assumethatthebetaforSAPwilldropto1,andthat
thefirmwillraiseitsdebtratioto20%.Keepingthe
cost of debt unchanged,
