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In order to improve profitability, cash flow and capital structure Stora Enso has set clear operational performance and financial targets which focus management on the business, thereby creating value for shareholders.
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 5%. The cost of equity represents a risk-free long-term interest rate of 4.5% with an added risk premium of 4%, giving an aggregate cost after tax of 8.5%. Assuming an average tax rate of 35%, the pre-tax cost of equity is approximately 13% and, with a debt/equity ratio of 0.8, the WACC before tax is around 9.5%, being the figure applicable to the ROCE calculations.
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 thus Stora Enso creates value for its shareholders when ROCE exceeds WACC.
The value created by product area is shown below,
where the WACC based on average operating capital
is deducted from operating profit, excluding non-recurring
items, to give the value created. The same WACC is
applied to all product areas except for Forest, which
uses a rate of 8% as a result of lower risk at operating
level.
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