Cost of Capital in 2026: How WACC Shapes European Company Valuations
Tim Guntermann
Founder & Managing Partner
Few numbers matter more to a company's value than its cost of capital. The weighted average cost of capital — WACC — is the rate at which future cash flows are discounted to present value, so even small changes ripple through every valuation, impairment test and investment decision. Heading into 2026, the cost-of-capital picture contains a paradox worth understanding: the European Central Bank has cut interest rates sharply, yet the cost of capital actually applied by German companies has edged higher.
Where do interest rates stand in 2026?
The ECB lowered its key rates aggressively from their 2023 peak. The deposit facility rate — the policy anchor — fell from 4.00% in September 2023 to 2.00% by June 2025, a 200 basis-point easing, and the Governing Council held rates there at its April 2026 meeting. Germany's risk-free benchmark, the ten-year Bund yield, has been more volatile, trading around 2.9–3.2% in the first half of 2026. The short end has fallen; the long end — which matters most for discounting long-dated cash flows — has been comparatively sticky.
What is a realistic WACC in 2026?
For German and DACH companies, the most authoritative reference is KPMG's annual Cost of Capital Study. Its 2025 edition — the twentieth — reports an average WACC of 8.5% across all sectors, up from 8.2% a year earlier, within a range of roughly 5.2% to 10.4%. The underlying parameters for Germany include a normalised risk-free rate of 2.5% and a market risk premium of 6.7%, implying an average cost of equity near 9.7%. Sector dispersion is wide: industrial manufacturing and technology sit highest at around 9.4%, while energy and natural resources (6.3%) and real estate (7.0%) sit at the lower end.
Why hasn't a falling base rate lowered the WACC?
This is the paradox, and it is instructive. Mechanically, a lower risk-free rate should reduce both the cost of equity and the cost of debt, lowering WACC and lifting valuations. Yet KPMG's average WACC rose even as the ECB cut, because the risk-free rate is only one input. Credit spreads and the cost of debt stayed elevated, and the equity component held firm. The lesson for valuation is that central-bank rate cuts do not mechanically lower a company's cost of capital — the equity risk premium, credit conditions and company-specific risk can easily offset a lower base rate.
What equity risk premium should you use?
Estimates of the equity risk premium — the extra return investors demand over the risk-free rate — vary by methodology, and the differences are not academic. Kroll, as of early 2026, recommends a Eurozone equity risk premium of 5.0–5.5%, which it lowered from 5.5–6.0% on improving growth expectations, paired with a normalised German risk-free rate of 2.5% (or the spot long-dated Bund yield, whichever is higher). Aswath Damodaran of NYU Stern, using a forward-looking implied approach, places Germany's total equity risk premium near 4.2% — among the lowest in Europe, given the country's minimal default risk. KPMG's surveyed figure of 6.7% is higher again because it captures the premium companies actually apply in practice. These figures are not interchangeable, and choosing among them can move a valuation materially.
A central-bank rate cut does not automatically lower a company's cost of capital — the equity risk premium and credit conditions can absorb the entire benefit.
The advisory takeaway
For anyone valuing a business in 2026 — whether for a transaction, a fairness opinion or an impairment test — the practical guidance is to resist headline narratives. "Rates are falling, so valuations must rise" is too simple. The cost of capital is built from several moving parts — the risk-free rate, the equity risk premium, beta, credit spreads and capital structure — and in the current environment those parts have been pulling in different directions. Rigorous, well-documented assumptions, benchmarked against authoritative sources such as KPMG, Kroll and the ECB, are what separate a defensible valuation from a convenient one.
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Tim Guntermann
Founder & Managing Partner