The statistically derived beta of an organization is highly volatile, with even one standard deviation often being significant. Therefore, industrial betas or betas from several organizations are taken, then de-levered and re-levered to obtain a more reliable beta.
The calculation of WACC should be based on the target financial structure. Some organizations have it determined, but often the industrial average is taken since the tendency should be in that direction.
When the existing financial structure is used as the target, excess cash is subtracted from the debt during the calculation.
The financial structure should consider all debts and debt equivalents, equity and its equivalents. All sources of funding that are not part of working capital and are not considered in operational cash flows should be reflected in the financial structure (e.g., employee options, capitalized leases, deferred taxes…).
The parameters that make up WACC should be based on inflation expectations that align with those on which the forecasted cash flows are based.
The tax benefit from interest expenses should be included in WACC, as it is not accounted for in cash flows.
WACC should be calculated using post-corporate tax components, as cash flows are based on post-corporate tax figures (NOPAT).
The durations of the components of WACC should match the durations of the forecasted cash flows. For example, when making long-term forecasts, one should not use short-term risk-free rates (typically, a 10-year rate is used).
*#VALUATION – Measuring and Managing the Value of Companies
7th Edition
McKinsey & Company
Tim Koller, Marc Goedhart, David Wessels