Explain the Ertragswertverfahren.
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The capitalized earnings method under IDW S1. Cash flows = distributable earnings (not UFCF) = profits available for distribution to shareholders after corporate tax and personal tax. Discount rate = CAPM-based, adjusted for personal taxes. Terminal value assumes sustainable distributable earnings growing at a rate not exceeding inflation. Commonly used for SME valuations where detailed FCF projections are less reliable.
WHAT INTERVIEWERS LISTEN FOR
- ✓Distributable earnings as cash flows
- ✓CAPM-based discount rate
- ✓Personal tax adjustment
- ✓Sustainable terminal growth
- ✓SME valuation focus
COMMON MISTAKES
- ✗Using UFCF instead of distributable earnings
- ✗Ignoring personal taxes in discount rate
- ✗Assuming high terminal growth rate
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