CORP

The Joys of Cooking

With API
At a time when
more data than ever
about securities
is available,
analysts need
ever more powerful
organizational tools
to help in their
decision making
By Daniel Matthies

important because they enable analysts to differentiate among firms and

to assess the companies ability to
raise capital for expansion into future
projects. A firm with low CAPM and
WACC may find it easier to raise
money. One with high CAPM and
WACC will need to generate a higher rate of return on future projects
in order to satisfy investors and
might therefore find raising funds
more difficult.
With API, you can set up your
spreadsheets so youll be able to retrieve data for any ticker. The calculations you set up in Excel will then
cook the data in a way that gives the
results you want. To enhance your
analysis, you also can graph the data.
In the same way as good ingredients are critical for a good meal, the
quality of data is a critical factor in
your making the right buy/sell decision. Its like any other analysis: what
you put in is what you get out, says
Marc Shapiro, an analyst at Awad
Asset Management in New York. If
you want reliable results, you have to
use reliable data. The financial data
on Bloomberg is taken directly from
financial statements issued by the
companies youre analyzing; then its
standardized as much as possible.
Why not offer a companys WACC
or CAPM directly on the Bloomberg
service rather than merely the capacity to compute those fundamentals?
The reason is that computational approaches to generating such measures arent
standardized. You may want
For other BLOOMBERG magazine articles
explaining how to use Source for Data
to incorporate many of your
with Bloombergs application interface,
own assumptions and aptype MAGZ API <Go>.
proaches into your calculations. API lets you incorpoType MAGZ <Help> for more
rate those beliefs into data
information on the function
youre calculating.

ood cooks and bad cooks

often start with the same
recipes. Its the quality of
the ingredients used and
the way those ingredients are mixed
and prepared that determine how
well a dish turns out.
Much the same rule applies to
investing. You need the right data,
and it must be blended in ways that
promote an analysis leading to a correct market decision. Thats essentially what happens when you use the
Open Bloombergthe API, or application interfaceto calculate financial fundamentals. API provides the
ratios you need and a place to cook
them into a decision-making format:
your Microsoft Excel spreadsheet.
Consider how to use API with
fundamentals like the Capital Asset
Pricing Model (CAPM) and Weighted Average Cost of Capital (WACC).
CAPM measures the return that
investors require on the equity a
company issues. It enables analysts
to compensate for the riskiness
of a firms projectsassuming all
projects the firm takes on carry
the same risk. WACC is the rate of return a company must pay to raise
long-term capital. Because WACC
considers both equity and debt,
it represents the incremental cost of
additional funding for the company
as a whole.
Both CAPM and WACC are

Tip Box

Bloomberg May 1999 91

Figure 1
COMPANY TICKER

RATING

AAA

SHAREHOLDERS EQUITY1

TOTAL DEBT1

DEBT/EQUITY

TAX RATE

COST OF DEBT

GROWTH ESTIMATE

31,412

168,247

5.36

34.2%

5.96000004%

7.563%
SML GRAPH

WACC = (%EQUITY * Re) + (%DEBT * (Rd (1 - Tc)))

25
20

CAPM = RF + B(Em - RF)

BETA

RISK-FREE RATE

RISK PREMIUM

13.884394%

1.08

4.542394%

8.65%

RETURN

4.495%

15
10
5

WACC using the CAPM = (%EQUITY * Re) + (%DEBT * (Rd (1 - Tc)))

0
0

5.489%

0.5

1
BETA

1.5

AVERAGE OF GROWTH AND CAPM

4.992%

Re = Required return on equity

Rd = Required return on debt

RF = Risk-free rate
Tc = Firm tax rate

For example, when calculating

WACC, you may prefer to use a
growth approach, or to take the
CAPM approach, or to average the
two. Using a familiar tool such as
Excel, you can set up the calculations to manipulate the data the
way you wish.
The accompanying spreadsheet
demonstrates some ways you can pull
in and manipulate data to calculate
WACC. Under Excels Bloomberg
pull-down menu located on the main
tool bar, select Field Search. Type in
a keyword or keywords in the space
after the words Show fields that contain, and press <Go>. For example,
to find fields that show earnings per
share, type EARNINGS PER SHARE
and press <Go>. Following are the
itemspulled in from the data dictionarythat are used for setting up
this spreadsheet:
Total shareholders equity
Total debt, long-term and short-term
Company tax rate
Cost of debt for a given rating
I/B/E/S Internationals growth
estimate
Beta
Risk-free rate: current three-month
U.S. Treasury
92 May 1999 Bloomberg

B = Beta
Em = Expected return for the market

For this example, heres a list of inputs you will need to supply:
Ticker
Appropriate equity rating to use
in analysis: AAA, AA2, AA3, A1,
A2, A3, B1, B2, or B3
Risk premium for equities

he spreadsheet youve
constructed now calculates
WACC three ways: one uses
the expected growth method
of determining a required return
for equity; the second uses the CAPM
approach for a required return on
equity; the third involves an average
of the other two (figure 1). Note that
often, the growth-rate model is based
on dividend growth. Unfortunately,
not all companies pay dividends, and
therefore Bloomberg substituted the
I/B/E/S estimate for long-term
growth in the expected-growth
method for calculating WACC.
Each way has advantages and
disadvantages. The expected-growth
methods main advantage is its simplicity: its easy to use and easy to
understand. The main disadvantages
are that it projects that growth will
remain constant and it doesnt
explicitly consider risk.

= Millions of dollars

The advantage of using the CAPM

model to determine the required
return for an equity is that it considers risk based on betathe relationship between changes in the value
of the equity and the value of
some benchmark index. Its main
disadvantage is that to make the
calculation, you need to know the
market-risk premium.
The third approachaveraging
the growth and CAPM modelsmay
be used to incorporate both methods. Its main appeal is that it often
decreases the level of error.
The way you organize your spreadsheet, of course, isnt set in stone.
Each field you pulled in can be overridden in the cell directly below.
Figures you set in this way then become part of the calculations. The
possibilities with Excel and API using
Excel fundamentals are thus endless.
Only your own analytic imagination
sets a limit.
Any comments? Type MAGAZINE
<Msge>. For reprints, type MAGZ <Go>.

Daniel Matthies is on the staff

of the Bloomberg Analytics
department in Princeton

Computing WACC with API

uppose you want to create a spreadsheet that for analytic purposes computes WACC using each of the three methods
described in the accompanying story. Heres a list of commands that establish the cell formulas and API calculation
overrides that facilitate such an analysis.

STEP 1

Cell G12=BLP(B3,IBES_EST_LONG_TERM_GROWTH)

Set up the IF statements

Note that cells B13G13 can be used to override the

values pulled into cells B12G12. To override, input
a value into one of the cells. That value will be included
in calculating WACC. To exclude the value youve entered,
go to that cell and press <Delete>. You may want to
highlight these cells to identify them.

Cell B1=IF(B13=,B12,B13)
Click on cell B1, and then point the mouse at the bottom
right of the cell so that the pointer becomes a plus sign (+).
Drag formula over to cell G1 so that the formula copies.
Cell B2=IF(B23=,B22,B23)

STEP 6

Same as above. Click on cell B2, and then point the mouse
at the bottom right of the cell so the pointer becomes a +.
Drag formula over to cell E2 so that the formula copies.

Calculate the WACC by using the growth approach

STEP 2
Allow API to interpret inputs

Cell C17=((D3*G1) + (E3*(F1*(1-(E1/100)))))/100

STEP 7
Pull in the fundamentals for CAPM

Cell B3=B8& Equity

Label cells B21E21 CAPM, Beta, Risk Free, and Risk

Premium, respectively.

Be sure to put a space after the first quotation mark.

Cell B22=D2 + (C2*(E2))

Cell C22=BLP(B3,EQY_BETA)

Cell C3=IN&30&Y&C8& Index

Cell D22=BLP(GB3 Govt,PX_ASK)

Be sure to put a space after the penultimate quotation mark.

Cell E22=8.65

STEP 3

Cell E22 is an estimate for equity-risk premium based

on the long-term premium required by stocks as well as
consideration added for the recent volatility in the market.

Calculate debt to equity

Cell D3=1-E3
Cell E3=D1/(1+D1)

STEP 4
Define input cells
Cells B8 and C8
Leave blank. This is where youll input the equity ticker and
rating, respectively. You may want to highlight or outline these
cells to identify them. Ratings that will work are AAA, AA2,
AA3, A1, A2, A3, B1, B2, and B3.

Cells B23E23 are overrides for the cells above. You may
want to highlight these cells to identify them.

STEP 8
Calculate the WACC by using CAPM
Cell C27=((D3*B2)+(E3*(F1*(1-(E1/100)))))/100

STEP 9
Take the average of WACC by using growth, and WACC
by using CAPM
Cell C31=((C27+C17)/2)

STEP 5
Pull in the fundamentals for WACC by using growth
estimates

STEP 10

Label cells B11G11 Shareholders Equity, Total Debt,

Debt/Equity, Tax Rate, Cost of Debt, and Growth Estimate,
respectively.

Put a zero in cell A34.

Cell B12 =BLP(B3,TOT_SHRHLDR_EQY)

Copy cell A35, down to cell A74.

Cell C12=BLP(B3,SHORT_AND_LONG_TERM_DEBT)

In cell B34, write =(($D$2 + (A34*($E$2)))).

Cell D12=C1/B1

Copy cell B34 down to cell B74.

Cell E12=BLP(B3,EFF_TAX_RATE)

Create an xy-style graph by using data from the range

A34:B74.
D.M.

Cell F12=BLP(C3,PX_BID)

Create the SML graph

In cell A35 write =A34 + .05.

Bloomberg May 1999 93