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Group M&A and Investments
Sandvik WACC 2017
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Wacc principles in sandvik
Pre-tax WACC equal to 10% should be used when calculating Impairment of fixed assets Investment appropriation requests for fixed assets Impairment of goodwill Impairment of equity and shares Post-tax WACC equal to 10%1) should be used when calculating M&A projects Note that the WACC is subject to change, actual WACC figures are always to be confirmed with KA/Group M&A and Investments TIP: Feel free to add a frame to the text box for further emphasize the comparison. 1) Includes an additional risk premium (‘ARP’) of 3% in the ‘cost of equity’ calculation
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Individual Risk adjustments
According to IFRS, asset/investment specific risks can either be captured by i) an additional risk premium in the discount rate or ii) in the projected future cash flow assumptions The Sandvik Group applies the second option, meaning that all asset/investment specific risks are to be carefully assessed and that the projected future cash flows assumptions must be altered to reflect those identified risks (e.g. country risk, industry risk, etc.) As a consequence, the Sandvik Group can apply one common, company wide, pre-tax WACC for all asset/investment evaluations, regardless of location and asset/investment type For more information regarding risk assessment, please see the procedures below Sandvik Investment and Lease Policy and Procedures (investment evaluations) Financial Reporting Policies and Procedures (impairment tests) Sandvik M&A Policy and Procedures (M&A projects) One exception is the risk adjusted post-tax WACC, only applicable to M&A projects, that includes an additional risk premium of 3% in the cost of equity calculations
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Sandvik WACC calculation
Weighted average cost of capital – Cost of equity 𝑊𝐴𝐶𝐶= 𝐷 𝐷+𝐸 𝐾𝑑+ 𝐸 𝐷+𝐸 𝐾𝑒 𝐾 𝑒 =𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦=𝑅𝑓+β𝑠 𝑅𝑚−𝑅𝑓 +𝐴𝑅𝑃 Rf = Risk free rate of return, normally a 10 year government bond Rm = Stock market premium. Market specific risk. The demanded premium to compensate for the additional risk for a specific market contra the risk free rate β = Beta. Company specific risk. volatility exceeding the markets movement ARP = Additional risk premium The cost of equity is calculated using the capital assets pricing model (‘CAPM’) A risk free rate (Rf) of 0.5% based on a Swedish 10 year government bond issued by Swedens’s central bank (Sw. ‘Riksbanken’) A stock market premium (Rm) of 6.1%, calculated as the average stock market risk premium during the last five years according to pwc’s annual report “Riskpremien på den svenska aktiemarknaden” from 2016 A Sandvik specific raw beta (β) of 1.31, gathered from Factset (5 year, daily prices, OMX Nordic Stockholm) Based on the above assumptions, the cost of equity in Sandvik is 8.5% For M&A projects, Sandvik applies an additional risk premium (‘ARP’) of 3% due to a higher risk level
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Sandvik WACC calculation
Weighted average cost of capital – cost of debt 𝑊𝐴𝐶𝐶= 𝐷 𝐷+𝐸 𝐾𝑑+ 𝐸 𝐷+𝐸 𝐾𝑒 The WACC is calculated based on the proportion of debt versus equity in Sandvik in Dec 31, 2016 The cost of debt (Kd) equals Sandvik’s average interest rate including interest effect of currency derivatives, totaling 4.2% in 2016 D = Debt E = Equity Kd = Cost of debt, financing cost Ke = Cost of equity
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Historic sandvik wacc The Sandvik WACC has remained stable around 10% during the last years Even though the risk free interest rate currently is very low, the impact is offset by a proportionally higher cost of equity
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Questions? In case of questions, please don’t hesitate to contact the Group M&A and Investments team
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Appendix
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Appendix Historic cost of debt versus equity
Note: Cost of debt equals Sandvik’s average interest rate including interest effect of currency derivatives
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Appendix Historic stock market premium vs. risk free rate
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