Need some help computing WACC to use as discount rate for my DCF model for a private company. Can anyone give me a step by step? Thank you.
refer to level 2 curriculum…very detailed analysis on this topic!
you need to use iterative WACC - calculating the WACC for a privately held company has some wrinkles because you do not know the market value of equity (you have to use an iterative process). See a good cost of capital book for details.
BTW - level II did not cover this (at least when I took it). Private company valuation was covered briefly in Level II with not much detail as far as I remember.
As a starting point, you could look at the WACC for the industry as a whole or for a few comparable peer companies. FYI, Morningstar sells industry-specific WACC reports for $100. Available on-line for immediate download… http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1426.xml "Industry Analysis Reports During the valuation process, professionals can quickly find trusted techniques and calculations in the Cost of Capital Resources Center. Its collection of industry reports explores U.S.-based industries by SIC code and includes: Analyses of approximately 350 industries per quarter, dating back to 2001, from the Ibbotson® Cost of Capital Yearbook Five separate measures of cost of equity and weighted average cost of capital Detailed statistics for sales, profitability, capitalization, beta, multiples, ratios, industry returns, and capital structure Explanations of formulas used to calculate cost of capital "