Wacc! Wacc!

Duck 3Yesterday in the Corporate Financial Management class, Prof. Dr. Mathieu Luypaert talked again about the WACC. As I arrived late and it’s not a habit, my attention level was maybe a bit higher than when I arrive on time ;-) So I became more interested in the WACC …

The WACC (Weighted Average Cost of Capital) is defined as “the rate that a company is expected to pay on average to all its security holders to finance its assets” (Wikipedia). It is then very different than the sound of a duck (btw the latter is also spelled differently: “quack”). As usual, Investopedia has the exact same formula Prof. Luypaert gave us (always cross-check ;-) – legend in the Investopedia article) and a nice explanation video …

WACC formula (from Investopedia)

Now, as I am working in the pharmaceutical sector, I was interested in the WACCs of pharma companies. For that purpose, Wikiwealth seems to give a straightforward way to get this value. Here are the WACCs of top pharma companies according to Wikiwealth (as of Feb. 2012):

Company WACC
Abbott (ABT) 7%
AstraZeneca 7%
Novartis (NVS) 7%
Johnson & Johnson (JNJ) 7%
Merck & Co. (MRK) 7%
Eli Lilly & Co. (LLY) 8%
GlaxoSmithKline (GSK) 8%
Pfizer (PFE) 8%
Sanofi-Aventis (SNY) 8%

So the WACC of pharma companies is around 7-8%. It’s a bit less that Apple (10%) – I know the comparison is stupid but I don’t think we had any class recently that didn’t mention that company. I was also briefly looking at other big, well-known companies and found that, according to Wikiwealth, their WACCs are around 7-9% for most of them. Some notable exceptions are for instance Kellogg (at 6%) or, at the other end of the spectrum, UBS (at 12%) or HSBC (at 14%).

With that, I’m leaving you here and heading for 6-7 hours of Corporate Financial Management …

Photo credit: Duck 3 by Phil_Parker on Flickr (CC-by)

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