Valuation Corner

Documentation on the Weighted Average Cost of Capital

1 – Selection of companies and classification by industry 

For each quarterly update, the Weighted Average Cost of Capital by industry is calculated based on the world’s listed companies with a market capitalization above € 250m. These companies are then split by industry according to the Global Industry Classification Standard (GICS). The retained sectors are the following:

• Energy & Utilities 

• Materials

• Capital Goods 

• Transportation

• Automotive 

• Media

• Retailing 

• Consumer Staples

• Consumer Services 

• Professional Services

• Healthcare 

• Information Technology

• Telecommunication Services 

• Real Estate

• Bank & Insurance 

2 – WACC calculation

The discount rate is based on the Weighted Average Cost of Capital (so-called WACC) and corresponds to the investment return expected by both shareholders and debt holders. It is determined by weighting the respective expected return of interest-bearing debt and equity in the financial structure. In each industry group, the median capital structure of selected companies is retained. 

In the banking and insurance industries, only the cost of equity is considered relevant.

The WACCs by industry are calculated on a EUR basis. No country risk premium or inflation differential is taken into account. 

The WACCs by industry do not take account any size or specific premium.

2.1 Cost of Equity 

2.1.1 General information

The cost of equity is determined based on the Capital Asset Pricing Model (“CAPM”). The CAPM estimates the rate of return on common equity as the current risk-free rate of return on government bonds, plus a market risk premium expected over the risk-free rate of return, multiplied by the beta for the stock. 

2.1.2 Risk free rate

The risk-free rate is the return on a risk-free asset, usually proxied by a measure of the yield rate on medium to long-term government bonds. It corresponds to the 3-month average yield on the 30-year French government bonds at the date of the WACC computation. 

2.1.3 Beta

The Beta (“B”) is the correlation between the risk in company returns and those of the market as a whole, which can be estimated from primary market data published by S&P Capital IQ. The beta is a risk indicator that measures the sensitivity of a company’s stock price to the movements of the stock market as a whole. 

Calculation of the 2-year leveraged b factor for each comparable company at the date of the WACC computation, on a weekly basis, using data provided by S&P Capital IQ. Listed companies whose correlation factor (R²) is below 0,05 are excluded from the sample.

2.1.4 Market risk premium 

The market risk premium is the excess return on the stock market over the risk-free rate that investors expect to earn. The market risk premium is determined on the basis of the current stock price of listed French companies and their expected dividend yield. It is currently estimated to range between 5.25% and 6.25% in France.

2.2 Cost of debt 

2.2.1 Risk free rate

The risk-free rate is the return on a “risk-free” asset, usually proxied by a measure of the yield rate on medium to long-term government bonds. It corresponds to the 3-month average yield on the 30-year French government bonds at the date of the WACC computation. 

2.2.2 Credit spread

The credit spread is determined on the basis of the yield spread observed for 30-year company bonds over the risk-free rate, with a BBB rating corresponding to the companies’ average. 

2.2.3 Taxes

The standard tax rate applicable in France, i.e. 25.8% including the additional social contribution, is used to derive the after tax cost of debt. 

2.3 Capital structure / gearing

For each industry group, the median capital structure observed on the sample of companies over a 2-year period is retained. Net debt data for each company is extracted from Capital IQ and includes short- and long-term financial debt, cash and cash equivalents. They do not take into account leasing debts relating to IFRS 16, for the sake of comparability. Equity data also extracted from Capital IQ includes market capitalization, minority interests and preferred shares. 

Documentation on the trading multiples

1 – Selection of companies and classification by industry 

See above.

2 – Trading multiples 

The determination of multiples by industry (see below for the Banking & Insurance industry) is based on the financial data of each company published by S&P Capital IQ. The following data is used to calculate company multiples: market capitalization (average of the last quarter), net debt (last known position over the last 12 months), financial aggregates for the last 12 months. The main impacts of IFRS 16 are restated for the sake of comparability: the net debt does not take into account leasing debts, the EBITDA is after depreciation on right-of-use assets. For each industry, the median multiple of the selected companies is presented.

EBITDA multiple: enterprise value / EBITDA (earnings before interest, tax, depreciation and amortization) after depreciation on right-of-use assets. 

EBIT multiple: enterprise value / EBIT (earnings before interest and tax).

The selected multiples for the banking and insurance industries are equity multiples. 

Price-earnings ratio (P/E ratio): market capitalisation / net income.

Price-to-book ratio (P/B ratio): market capitalisation / book value of equity.