WACC of a specific project

CFA Level I Corporate Finance
#1

Hi everybody,

I am a bit confused with one concept and would like to confirm something with you:

I always thought that when we were computing the WACC of a project that a company wanted to do, we were using the WACC of the whole firm based on the capital structure of the firm and not the capital structure used to finance the specific project.

However after checking for few topics in the forum, I found different type of answers. Some says that we should use the capital structure of the project to re-lever the beta and then the capital structure of the company to compute the WACC. Some other says the opposite: to use the capital structure of the company to compute the beta and then the capital structure of the project to compute the WACC.

My initial understanding was to use the capital structure of the firm for both or ideally the targeted capital structure.

Could someone clarify this point with me? Thanks in advance for your help!

#2

I believe within the context of the CFA they will not ask you to calculate different project WACC, due to how complex and time consuming it is. However the CFA exam will ask you to lever and relever beta, aka know how to calculate an equity beta from an asset beta… and perhaps even calculate the cost of equity from the equity beta (but that is probably as far as they will go).

Outside of the CFA exam, many text books will tell you to unlever beta, and relever beta and calculate a new cost of equity, and from that new cost of equity calculate a WACC. The reason for that is that different divisions within a firm exhibit different levels of risk. For example if a conglomerate firms have one business divsion that makes cell phones and another division that makes spaceships, it would make no sense to use the same WACC, because doing so will assume the same level of risk.