WEIGHTED-AVERAGE COST OF CAPITAL
The weighted-average cost of capital (WACC) for a company represents the minimum return that a
company must earn on existing asset base to satisfy its creditors, owners, and other providers of
capital. The basic formula1 is shown here:
E
D
RW ACC 
KE 
K D (1  tC )
DE
DE
where, E = the market value of equity
D = the company’s debt
KE = the cost of equity (CAPM)
KD = the cost of debt
tc = corporate tax rate
Bloomberg WACC for Staples (NYSE: SPLS):
As you can see from the figure above, Bloomberg distinguishes between the short and long term debt
and includes preferred equity (if any). This expanded formula is shown below.
E
D
P
RWACC  K E  K D (1  tC )  K P
V
V
V
where, E = the market value of equity
D = the company’s debt
P = the company’s preferred stock
V = The total value of the company’s (E)quity + (D)ebt + (P)referred stock.
KE = the cost of equity (CAPM)
KD = the cost of debt
KP = the cost of the preferred stock2
tc = corporate tax rate
1
The formula can become more complex with a more complicated capital structure, as different weights and costs are
assigned to various securities (i.e. preferred equity, straight debt, convertible debt, exchangeable debt, warrants, options,
pension liabilities, executive stock options, governmental subsidies, etc.).
2
Note: Since preferred dividends are not tax deductible, there is no adjustment for tax. The cost of preferred stock can be
calculated using the preferred dividend (DPS), the preferred stock price (PPS), and the flotation (or underwriting) cost as a
DPS
percentage of proceeds (F). K 
. Flotation costs for preferred stock range from 2-6% of proceeds.
P
PPS 1  F 
Bloomberg WACC
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Capital Structure: The capital structure used in the WACC calculation should be based on market
values rather than book values because we are concerned with estimating how much it will cost a
company to raise the capital today (this cost is best estimated based on “market” rather than “book” or
“accounting” figures). Target weights may also be used in calculating WACC since companies will
often lever up or down toward a desired debt–equity weighting. Note: this is usually towards the
average debt-equity weighting in their industry or peer group.
The Capital Structure for SPLS consists of the following elements
 Common Equity (see note #1)
97.88%
 Short-term debt
0.14%
 Long-term debt
1.99%
 Preferred equity
+ 0%
100%
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1) Market Capitalization – Bloomberg calculates “Common Equity” using the shares outstanding
from the latest period company statement multiplied by the closing prices as of the fiscal end date.
To view the data behind this figure you can type: “SPLS Equity FA”
Select 1) Overview:
Select 15) Hist market cap:
Select 3) Data Transparency:
Bloomberg WACC
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Select 5) 02/2008 16861980.00:
You can now click “2008 Shares Outstanding”, which will give you the unadjusted values (i.e. the
number of shares issued 867,366,103 and the treasury stock 162,728,588):
If you click on these figures, Bloomberg will take you to the page of the financial statements where the
figure was pulled and will highlight the figure. For example in the case for shares outstanding you will
be brought to the Balance Sheet on page C-3 of Staples 2007 10K:
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Debt maturing within one year
$
Total current liabilities
Long-term debt
Other long-term obligations
Minority interest
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued
Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 867,366,103 shares at February 2, 2008 and 849,338,568
shares at February 3, 2007
Additional paid-in capital
Cumulative foreign currency translation adjustments
Retained earnings
Less: treasury stock at cost, 162,728,588 shares at February 2, 2008 and 130,605,591 shares at February 3, 2007
Bloomberg WACC
$
2,788,383
342,169
356,043
10,227
316,465
261,643
9,109
—
—
510
3,338,412
189,115
4,005,424
(2,511,796)
5,718,007
$
1,486,188
1,087,030
215,165
2,609,898
520
3,720,319
476,399
4,793,542
(3,272,773</FONT>)
Total stockholders' equity
Total liabilities and stockholders' equity
1,560,728
1,025,364
23,806
9,036,344
5,021,665
$
8,397,265
4
Cost of Equity – The cost of equity that Bloomberg uses is derived from the CAPM model:
CAPM  rf    rm  rf 
Note: The discrepancies to the figures in the table below are a result of rounding.
CAPM  3.3%  1.07 10.27%  3.33%  10.75%
Note:
CAPM = 14.10% + 1.26 (11.72% - 2.57%) = 25.63%
Equity Risk Premium = 1.26 (11.72% - 2.57%) = 11.53%
Country Premium = 11.72% – 2.57% = 9.15 %
In Bloomberg, if you would like to update the market capitalization figure used in the equation, it can
be changed here - all other cost of equity variables can also be changed in this window.
1) Risk Free Rate – is equal to the yield of the 10-year treasury (see below). Bloomberg constantly
updates this figure during market hours to reflect the current yield.
To view the data behind the risk free rate you can type: “CT10 Govt HP”
Bloomberg WACC
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2) Expected Market Return - The expected market return is based on the dividend discount model.
Cost of Debt – The pre-tax cost of long term debt is based on the company’s credit rating. The lower
the rating the higher the factor.
The “debt adjustment factor” used in the calculation is based on the average yield spread between
corporate bonds for a given credit class and government bonds.
Cost of Debt = { [(SD/TD) x (TN x AF)] + [(LD/TD) x (TB x AF)] } x [1 – TR]
Where; SD = Short Term Debt
LD = Long Term Debt
TD = Total Debt
AF = Debt Adjustment Factor
TN = Avg. Rate of Treasury Notes
TB = Treasury Bond Rate
TR = Tax Rate
Example:
Bloomberg WACC
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On 12/3 (shown below) 10 year bonds were yielding 7.0161%, this is the “Pre-tax Cost L.T. Debt”
Net Operating Profit After Tax (NOPAT) is the after-tax profit a company would have if it had no
debt and no investments in non-operating assets. Because it excludes the effects of financial decisions,
it is a better measure of operating performance than net income.3
NOPAT ≈ EBIT(1-tax rate) (update: economic value add)
Bloomberg NOPAT = Net Operating Profit – Cash Operating Taxes:
Note: This is a basic formula, Bloomberg calculates NOPAT = Net Operating Profit – Cash Operating Taxes. In addition
Case Studies in Corporate Finance, p. 218 notes that adjustments might include adding back goodwill, amortization, and
other noncash expenses. Taxes should be adjusted to reflect only actual cash taxes. Finally depreciation is not added back
(despite being a noncash expense) because depreciation represents a true economic cost – it is the amount that must be
reinvested to maintain operations at the existing level.
3
Bloomberg WACC
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Economic Value Added:
Total Invested Capital – is a measure of the economic capital from shareholders, lenders and other
financial resources that is tied up in the business for the purpose of funding the company operations. It
is derived by deducting non-financing accounts such as account payables and accrued expenses,
capitalizing several types of expenses and adding off-balance sheet items to total liabilities and equity.
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Return on Invested Capital (ROIC) = is the ratio of NOPAT to total operating capital (Note: value
creation entails generating after-tax cash returns above the cost of capital invested in the business).
ROIC = NOPAT / Total Operating Capital
Where,
Operating Capital = NOWC + Net fixed assets
NOWC = Operating Current Assets – Operating Current Liabilities
Operating current assets = [cash + inventory + receivables]
Operating current liabilities = [accounts payable + accruals]
EVA & EVA Spread
EVA = NOPAT – Capital Charge; where Capital Charge = (WACC %) x (Total Invested Capital)
EVA Spread = ROIC% - WACC %
Graduate Assistant, John Giannantonio helped to prepare this class note.
Bloomberg WACC
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