Axactor Annual Report 2016

Risk free rate The risk-free rate used in the calculation of the WACC is based on the SEK risk free interest rate, which on 31st December was priced at 0.549%. However, the Group has a significant part of the cash flows in other different currencies, the largest being EUR. The 10-year government bond for EUR was 0.207%. Given the fluctuations in the yield for these bonds we deem it reasonable and conservative to use the SEK risk free rate as basis for the risk-free rate for the Group. Calculating a EUR specific WACC, the risk-free rate element would have decreased the WACC slightly compared to the WACC estimated for the Group. Risk premium Based on empirical research done the long-term risk premium is about 4-6%. It is reasonable to assume that the risk of investing in non-performing loan portfolios is in the higher end of the observed average market risk premium. Therefore, a company risk premium of 6% is added to the calculation. These risk premiums are based on the research found by Ibbotson Risk Premiums Over Time Report Equity Beta The equity beta is based on observations for a peer group of companies 5 years of weekly observations for market peers. The calculations are based on data from Bloomberg. We have relevered this based on net interest bearing debt at 31.12. Relevered beta is estimated to 1.09. Future cash flow estimates The future cash flow estimates are based on the current 15 year IFRS forecast for the current asset base with no value after this 15-year period. Therefore, there are no adding cash flows from future investments included in the fair value estimation. Cost of Capital calculation – WACC Factor 31 Dec 2016 10-year risk-f ree rate 0.549 % Market risk premium 6.3 % Equity Beta (Observed) Raw 1.02 Beta relevered 1.09 Company risk premium 6 % Net Interest bearing debt 90.4 mSEK Tax rate is not used as the net cash flows in the fair value calculation are net of tax WACC 9.4 % See note 16 for further details. Goodwill In accordance with the stated accounting policy, the group annually tests whether goodwill has suffered any impairment or more frequently if impairment indicators are identified. The recoverable amount of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. The value-in-use calculation is based on a discounted cash flow model. The cash flows are derived from the budgets and forecasts for the next three years, as approved by the Company's Board of Directors, and do not include significant investments that will enhance the performance of the CGU being tested. The recov- erable amount is most sensitive to the discount rate used for the discounted cash flow model, as well as the expected future cash-inflows (sensitive to estimates of sales and cost levels) and the growth rate used for extrapolation purposes. Further details about goodwill and impairment reviews are included in Note 14 Impairment. Deferred tax assets Deferred tax assets are recognised for unused tax losses only to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits, and deferred tax assets have been recognised in the balance sheet. The recognised amount is most sensitive to expected future taxable profits. Information on deferred tax assets is disclosed in Note 11. Share based payments The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the options at the date at which they are granted. Estimating the fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including expected life of the share option and volatility and making assumptions about them. The assumptions and model used for estimating fair value for share-based payment transaction are disclosed in Note 22. Solicitor cost Expensed solicitor fees comes from invoiced from external solicitors, however as cases can stretch over time some of the costs must be accrued based on different assumptions and estimates. The process for determination of assumptions and building up estimates have been subject to review by group management during 2016, which has led to improved routines. Axactor AB | Annual report 2016 40