The weighted average return on assets, or WARA, is the collective rates of return on the various types of tangible and

intangible asset An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets (machinery, buildings, etc.) and fin ...

s of a company. The presumption of a WARA is that each class of a company's asset base (such as manufacturing equipment, contracts, software, brand names, etc.) carries its own

rate of return In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest payments, coupons, cas ...

, each unique to the asset's underlying operational risk as well as its ability to attain

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

and equity. Tangible assets, generally speaking, carry a lower rate of return due to two factors: * Debt financing—tangible assets can be provided as collateral in attracting debt capital, which typically require a lower rate of return than equity capital * Stability of earnings—tangible assets tend to provide more certainty in expected earnings, which reduces risk to the financier of the asset Intangible assets, in contrast, carry a higher rate of return due to the same factors above. Averaging these rates of returns, as a percentage of the total asset base, produces a WARA. In theory, the WARA should generate the same cost of capital as the

Weighted average cost of capital The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm's cost of capital. Importantly, it is dictated by t ...

, or WACC. The theory holds true because the operating entity is considered fundamentally equivalent to the combined assets of the company. Therefore, the measure of risks across each are equivalent. In the case of the operating entity, risk is measured against the WACC, while in the case of the combined assets, risk is measured by the WARA. Reconciliations between the two are typically required as a component of a

Purchase price allocation Purchase price allocation (PPA) is an application of goodwill accounting whereby one company (the acquirer), when purchasing a second company (the target), allocates the purchase price into various assets and liabilities acquired from the transacti ...

in accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS 141”).Summary of Statement No. 141: Business Combinations (Issued 6/01)
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References

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