The Wacc User's Guide

24 Pages Posted: 11 Apr 2005

Abstract

The estimation of corporate capital costs is complicated by many practical issues that create numerous degrees of freedom and lead to wide-ranging results. We provide pragmatic solutions including:

* A global market risk premium (MRP) of about 5%, based on historical data, market expectations, and a review of the literature

* Several methods to derive reliable beta estimates including direct regressions, portfolio regressions, and constructed betas

* A normalized nominal riskless rate of about 5%, based on forward looking market data

* A value of tax shield framework that implies lower value and higher WACCs for more leveraged or volatile situations

* The WACC of a convertible bond, based on its economic decomposition of debt and equity

* A framework for global capital costs to supplement the risk analysis and qualitative considerations involved in global investing where risks are subject to rapid change . . . other international risks and costs should be incorporated into the cash flows and sensitivity analysis

Suggested Citation

Pettit, Justin, The Wacc User's Guide. Available at SSRN: https://ssrn.com/abstract=683313 or http://dx.doi.org/10.2139/ssrn.683313

Justin Pettit (Contact Author)

Independent ( email )

United States
9146092011 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
3,196
Abstract Views
10,482
Rank
7,106
PlumX Metrics