Good cooks and bad cooksoften start with the samerecipes. Its the quality ofthe ingredients used andthe way those ingredients are mixedand prepared that determine howwell a dish turns out.

Much the same rule applies to investing. You need the right data,and it must be blended in ways thatpromote an analysis leading to a cor-rect market decision. Thats essential-ly what happens when you use theOpen Bloombergthe API, or appli-cation interfaceto calculate finan-cial fundamentals. API provides theratios you need and a place to cookthem into a decision-making format:your Microsoft Excel spreadsheet.

Consider how to use API with fundamentals like the Capital AssetPricing Model (CAPM) and Weight-ed Average Cost of Capital (WACC).CAPM measures the return that investors require on the equity acompany issues. It enables analysts to compensate for the riskiness of a firms projectsassuming allprojects the firm takes on carry the same risk. WACC is the rate of re-turn a company must pay to raiselong-term capital. Because WACCconsiders both equity and debt, it represents the incremental cost ofadditional funding for the companyas a whole.

Both CAPM and WACC are

important because they enable ana-lysts to differentiate among firms andto assess the companies ability toraise capital for expansion into futureprojects. A firm with low CAPM andWACC may find it easier to raisemoney. One with high CAPM andWACC will need to generate a high-er rate of return on future projects in order to satisfy investors and might therefore find raising fundsmore difficult.

With API, you can set up yourspreadsheets so youll be able to re-trieve data for any ticker. The calcu-lations you set up in Excel will thencook the data in a way that gives theresults you want. To enhance youranalysis, you also can graph the data.

In the same way as good ingredi-ents are critical for a good meal, thequality of data is a critical factor inyour making the right buy/sell deci-sion. Its like any other analysis: whatyou put in is what you get out, saysMarc Shapiro, an analyst at AwadAsset Management in New York. Ifyou want reliable results, you have touse reliable data. The financial dataon Bloomberg is taken directly fromfinancial statements issued by thecompanies youre analyzing; then itsstandardized as much as possible.

Why not offer a companys WACCor CAPM directly on the Bloombergservice rather than merely the capaci-ty to compute those fundamentals?

The reason is that computa-tional approaches to gener-ating such measures arentstandardized. You may wantto incorporate many of yourown assumptions and ap-proaches into your calcula-tions. API lets you incorpo-rate those beliefs into datayoure calculating.

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

Bloomberg May 1999 91

CORP

For other BLOOMBERG magazine articlesexplaining how to use Source for Datawith Bloombergs application interface,type MAGZ API .

Type MAGZ for moreinformation on the function

Tip Box

For example, when calculatingWACC, you may prefer to use agrowth approach, or to take theCAPM approach, or to average thetwo. Using a familiar tool such asExcel, you can set up the calcula-tions to manipulate the data the way you wish.

The accompanying spreadsheetdemonstrates some ways you can pullin and manipulate data to calculateWACC. Under Excels Bloombergpull-down menu located on the maintool bar, select Field Search. Type ina keyword or keywords in the spaceafter the words Show fields that con-tain, and press . For example,to find fields that show earnings pershare, type EARNINGS PER SHAREand press . Following are theitemspulled in from the data dic-tionarythat are used for setting upthis 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

For this example, heres a list of in-puts 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

The spreadsheet youveconstructed now calculatesWACC three ways: one usesthe expected growth methodof determining a required return for equity; the second uses the CAPMapproach for a required return onequity; the third involves an averageof the other two (figure 1). Note thatoften, the growth-rate model is basedon dividend growth. Unfortunately,not all companies pay dividends, andtherefore Bloomberg substituted theI/B/E/S estimate for long-termgrowth in the expected-growthmethod for calculating WACC.

Each way has advantages and disadvantages. The expected-growthmethods main advantage is its sim-plicity: its easy to use and easy to understand. The main disadvantagesare that it projects that growth will remain constant and it doesnt explicitly consider risk.

The advantage of using the CAPMmodel to determine the required return for an equity is that it consid-ers risk based on betathe relation-ship between changes in the value of the equity and the value of some benchmark index. Its maindisadvantage is that to make the calculation, you need to know themarket-risk premium.

The third approachaveragingthe growth and CAPM modelsmaybe used to incorporate both meth-ods. Its main appeal is that it oftendecreases the level of error.

The way you organize your spread-sheet, of course, isnt set in stone.Each field you pulled in can be over-ridden in the cell directly below. Figures you set in this way then be-come part of the calculations. Thepossibilities with Excel and API usingExcel fundamentals are thus endless.Only your own analytic imaginationsets a limit.

Any comments? Type MAGAZINE. For reprints, type MAGZ .

Daniel Matthies is on the staff of the Bloomberg Analytics department in Princeton

92 May 1999 Bloomberg

COMPANY TICKER RATING

F 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%

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

4.495%

CAPM = RF + B(Em - RF) BETA RISK-FREE RATE RISK PREMIUM

13.884394% 1.08 4.542394% 8.65%

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

5.489%

AVERAGE OF GROWTH AND CAPM

4.992%

SML GRAPH

0 0.5 1 1.5 2BETA

RET

UR

N

25

20

15

10

5

0

Re = Required return on equityRd = Required return on debt

RF = Risk-free rateTc = Firm tax rate

B = BetaEm = Expected return for the market

1 = Millions of dollars

Figure 1

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

Computing WACC with API

Bloomberg May 1999 93

STEP 1Set up the IF statements

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)

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

STEP 2Allow API to interpret inputs

Cell B3=B8& Equity

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

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

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

STEP 3Calculate debt to equity

Cell D3=1-E3

Cell E3=D1/(1+D1)

STEP 4Define input cells

Cells B8 and C8

Leave blank. This is where youll input the equity ticker andrating, respectively. You may want to highlight or outline thesecells to identify them. Ratings that will work are AAA, AA2,AA3, A1, A2, A3, B1, B2, and B3.

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

Label cells B11G11 Shareholders Equity, Total Debt,Debt/Equity, Tax Rate, Cost of Debt, and Growth Estimate,respectively.

Cell B12 =BLP(B3,TOT_SHRHLDR_EQY)

Cell C12=BLP(B3,SHORT_AND_LONG_TERM_DEBT)

Cell D12=C1/B1

Cell E12=BLP(B3,EFF_TAX_RATE)

Cell F12=BLP(C3,PX_BID)

Cell G12=BLP(B3,IBES_EST_LONG_TERM_GROWTH)

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 . You may want to highlight these cells to identify them.

STEP 6Calculate the WACC by using the growth approach

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

STEP 7Pull in the fundamentals for CAPM

Label cells B21E21 CAPM, Beta, Risk Free, and Risk Premium, respectively.

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

Cell C22=BLP(B3,EQY_BETA)

Cell D22=BLP(GB3 Govt,PX_ASK)

Cell E22=8.65

Cell E22 is an estimate for equity-risk premium based on the long-term premium required by stocks as well asconsideration added for the recent volatility in the market.

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

STEP 8Calculate the WACC by using CAPM

Cell C27=((D3*B2)+(E3*(F1*(1-(E1/100)))))/100

STEP 9Take the average of WACC by using growth, and WACC by using CAPM

Cell C31=((C27+C17)/2)

STEP 10 Create the SML graph

Put a zero in cell A34.

In cell A35 write =A34 + .05.

Copy cell A35, down to cell A74.

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

Copy cell B34 down to cell B74.

Create an xy-style graph by using data from the rangeA34:B74. D.M.