Estimation of the cost of equity

The cost of equity will be calculated based on the CAPM and a liquidity risk premium. The CAPM elements consist of the risk-free rate, the market risk premium, and equity beta, and we will present the estimation of these values in the coming subchapter.

Risk-free rate

To estimate the future risk-free, we deploy the framework presented by Knivsflå (2020d), with the elements of a Norwegian 10-year bond, US 30-year bond, and 3M NIBOR. It is expected that the risk-free rate in the long-term will converge toward the average, and in a steady state, be constant (Knivsflå, 2020d). Today's interest rates are significantly below the historical average, making it challenging to forecast the risk-free rate. Since the historical average is substantially larger than today's level, it is plausible to expect that the interest will increase as the economy recovers from the pandemic. It is expected to increase to ~2.00% in the medium term, before normalizing at ~3.00% in the long-term (Knivsflå, 2020d). To estimate a

“normal” risk-free rate, we weight the 3M NIBOR 2/3, and the average of a Norwegian 10-year bond and US 30-10-year bond with 1/3.

𝑅𝑓 = (2

3) × (𝐴𝑣𝑒𝑟𝑎𝑔𝑒 3𝑀 𝑁𝑖𝑏𝑜𝑟) + (1

3) ×(10𝑦𝑁𝑜𝑟𝑤𝑒𝑔𝑖𝑎𝑛𝑏𝑜𝑛𝑑 + 30𝑦𝑈. 𝑆𝐵𝑜𝑛𝑑)

2 Eq.26

The estimated average of 3M NIBOR between 1996 and 2019 is 3.5%, and the average of the two bonds are 1.9%, providing a normal long-term interest rate to be 3.0%. We decided to implement the bond yields from November 2019, as the COVID-19 caused all interest rates (yields) to plummet, distorting the long-term estimation. If the risk-free rate in the steady state is artificially low, the other costs of capital will also be affected by this, which would affect the final valuation of Aker BioMarine.

Nonetheless, what exemplifies that the projected interest rate is adequate, is that the financing cost is fundamentally higher than long government security yields. Long government security yields are relied upon to give a good sign of how the interest level will develop over the long haul. This way, it is close to guaranteeing that a gross risk-free rate of 3.0% in a steady state can be safeguarded.

Further, to calculate the risk-free rate after tax in the forecasting, it is essential to predict its future tax rate and the Norwegian banks' risk premium. We have no indications that lead us to believe there will be changes in the statutory tax rates, therefore we project it to be fixed at 23% during the whole period. Lastly, we assume that the banks' average credit rating of AA will be constant during the whole period (Knivsflå, 2020d).

Exhibit 50: Risk-free rate forecasting

Forecast CV

2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

3M NIBOR 0.51% 0.83% 1.32% 1.86% 2.01% 2.15% 2.35% 2.57% 2.78% 2.93% 3.00%

Credit premium (AA) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%

Gross risk-free rate 0.01% 0.33% 0.82% 1.36% 1.51% 1.65% 1.85% 2.07% 2.28% 2.43% 2.50%

Tax (23%) 0.00% 0.08% 0.19% 0.31% 0.35% 0.38% 0.43% 0.48% 0.52% 0.56% 0.58%

Net risk-free rate 0.01% 0.25% 0.63% 1.05% 1.16% 1.27% 1.42% 1.59% 1.76% 1.87% 1.93%

Source: Knivsflå (2020d) and own projections

Market risk premium

It is problematic to predict how the market risk premium will develop in the coming years, and the best estimate for the future risk premium is based on the historical (Knivsflå, 2020d).

Thus, we consider the current market risk premium of 5.1% to be constant in our forecasts.

PwC's annual questionnaire (2019) suggests that the current risk premium is at ~5% and that there are no indications that the future risk premium will deviate significantly. Further, both Kaldestad et al. (2016) and Knivsflå (2020d) assert that the market's risk premium is likely to be constant at ~5%. Hence, we deem 5.1% to be the appropriate risk premium in all the forecasted years in the valuation.

Equity beta

To retrieve the equity beta of Aker BioMarine, we decided to use the average asset beta of the peers presented in the historical analysis, adjusted it for the capital structure of Aker BioMarine. Since the company only has been listed for a few months, there are not enough data to derive a reliable equity bet. Koller et al. (2020) suggest that the equity beta should be derived from a minimum of 60 data points with monthly returns, and Thomson Reuters’ Eikon requires that the stocks have minimum been traded for 30 months to derive a reliable beta.

Appendix 5 displays the regression analysis with the returns of Aker BioMarine against Oslo

Børs, whereas the implied equity beta was 0.845. The beta will neither be weighted nor included further in the analysis of Aker BioMarine as the data sample is inadequate.

Exhibit 51: Average industry beta calculations

Aker BioMarine - Beta calculations

Peers Equity beta Adjustment factor Asset beta

DSM 0.862 -0.187 0.675

Probi 0.971 -0.003 0.968

Midsona 0.790 -0.281 0.509

Glanbia 0.531 -0.166 0.365

Average industry beta 0.629

The equity betas were retrieved from Thomas Reuters' Eikon software and adjusted for their capital structure before arriving at the asset beta. We assume the asset beta will be constant throughout the valuation.

Exhibit 52: Equity beta forecasting

Forecast CV

2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Asset beta 0.629 0.629 0.629 0.629 0.629 0.629 0.629 0.629 0.629 0.629 0.629 Adjustment factor 0.393 0.555 0.578 0.547 0.491 0.401 0.317 0.254 0.194 0.142 0.145 Blume adjustment - - - - - -0.010 -0.018 0.039 0.059 0.076 0.075 Equity beta 1.022 1.184 1.207 1.176 1.120 1.020 0.964 0.922 0.882 0.848 0.850

The asset beta has been adjusted for the capital structure changes every year in our forecast to find the appropriate beta for each year. The long-term equity betas are Blume-adjusted to incorporate the empirical evidence implying that all betas converge towards the beta of the market portfolio in the long haul. Since Aker BioMarine's beta is below 1, the Blume-adjustment increases the beta, and consequently the capital cost.

Liquidity premium

We deploy a liquidity premium of 4.20% in 2020, which is related to the low free float in the share and the lack of diversification in ownership. Aker BioMarine expects to be listed on the main index during 2021, so we adjust the liquidity premium to incorporate the probability.

After 2022, we expect Aker BioMarine to be listed on the main index, but we still adjust the equity cost by 2.1% due to the substantial ownership concentration.