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Weighted Average Cost of Capital ("WACC")
WACC represents the aggregate cost of debt and equity. The cost of debt for Stora Enso´s current loan portfolio approximates 6%. The cost of equity represents a risk-free long-term interest rate of 5% with an added risk premium of 4%, giving an aggregate cost after tax of 9%. Assuming an average tax rate of 35%, the pre-tax cost of equity is approximately 14% and, with a debt/equity ratio of 0.8, the WACC before tax is around 10%, being the figure applicable to the ROCE calculations; for discounted cash flow purposes, the corresponding WACC is about 7%.
Return On Capital Employed ("ROCE")
One of the key Group targets is a ROCE of 13% over the economic cycle. ROCE is defined as operating profit, excluding non-recurring items, divided by average capital employed. The ROCE is compared to the WACC and therefore Stora Enso creates value for its shareholders when ROCE exceeds WACC.
The value created by product area is shown in table Operating Profit and Value Creation by Product Area, where the WACC based on average operating capital is deducted from the operating profit, excluding non-recurring items, to give the value created. The same WACC is applied to all product areas except for Forest, which has a lower risk factor at operating level with a resulting WACC of 8%.
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