Why does the IDW S1 Ertragswert method model the retention and reinvestment of earnings (Thesaurierung) explicitly, and how does it affect value?
An advanced Valuation question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
IDW S1 doesn't simply assume full distribution; it requires modelling the company's realistic dividend/retention policy across the planning and terminal phases. In the detailed planning phase, the actual planned distributions and retentions are used. For retained earnings (Thesaurierung), the standard assumes they are reinvested — either in value-creating projects earning at least the cost of capital, or, in a common convention, attributed/value-adding to shareholders (e.g., through a notional reinvestment at the cost of capital or fictitious direct attribution) — so that retained value isn't lost. This matters because, combined with the Tax-CAPM, the treatment of distributed vs retained earnings changes the personal-tax burden (dividends vs capital-gains treatment) and therefore the net flows to owners and the value. Getting the distribution/retention and reinvestment assumptions wrong materially shifts the Ertragswert, which is why it's a scrutinized, often litigated, part of German appraisals.
WHAT INTERVIEWERS LISTEN FOR
- ✓Models realistic distribution vs retention, not full payout
- ✓Retained earnings assumed reinvested at ≥ cost of capital or attributed to owners
- ✓Interacts with Tax-CAPM: dividend vs gains personal-tax treatment
- ✓Materially affects net flows and the Ertragswert
COMMON MISTAKES
- ✗Assuming full distribution by default
- ✗Letting retained earnings 'vanish' from value
- ✗Ignoring the personal-tax interaction
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RELATED QUESTIONS
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- 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?