When calculating WACC for a company with multiple divisions in different countries, what is the correct approach?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
You should calculate a divisional WACC for each division using the division's specific cost of equity (based on its business risk and country risk) and cost of debt, then weight them by the division's proportion of the firm's total enterprise value. Alternatively, if the divisions are very different, use a pure-play approach for each. A single corporate WACC would be incorrect if divisions have different risk profiles.
WHAT INTERVIEWERS LISTEN FOR
- ✓Divisional WACCs based on divisional risk
- ✓Use pure-play method for each division
- ✓Weight by division's EV proportion
- ✓Avoid single corporate WACC if risks differ
COMMON MISTAKES
- ✗Using one WACC for all divisions
- ✗Ignoring country risk differences
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