How to Use WACC to Value a Company

Andrew Stotz  |

According to our recent survey, the average Thai listed company pays 8.9% for the money it uses to run its business. This rate is commonly referred to as the WACC. About 30% of these funds come from borrowing, while the remaining comes from the more expensive equity market.

A key input in the process of company valuation is the calculation of the cost of capital. This is calculated by considering the cost of debt and the cost of equity. The mix that any particular business uses of these two components determines that company’s Weighted Average Cost of Capital (WACC).

Companies estimate the cost of capital to use as a ‘hurdle’ rate, seeking projects that have profitability over this hurdle or minimum return. Financial analysts use the cost of capital as an assessment of the level of riskiness that they assign to the company’s future cash flows.

If an analyst assigns a high cost of capital to a company, she thinks that the company’s future cash flows are worth much less than their nominal forecasted value. In such a case, she ‘discounts’—or reduces—those future cash flows by this high cost of capital.

Think about this discounting much like the difference between lending one hundred dollars to a stranger for one week vs. lending the same amount to your most trusted friend. For the stranger, you would assign a high risk to the likelihood that you would get that money back, hence you would discount its one-hundred-dollar value. If you thought there was a 50% chance you would get the one hundred dollars back and a 50% chance you would get nothing then the discounted value would be fifty dollars.

In this research, we surveyed 13 sell-side research operations in Thailand; with eight being regional firms, three being local firms, and two global investment banks.

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The survey data was recovered from 42 different Thai stock exchange listed companies.

The average WACC that analysts calculated in their recent discounted cash flow valuations was 8.9%. This average did not take into consideration the WACC for individual companies or sectors but just attempted to find the average for all surveyed companies used in Thailand.

There were 51 observations; with 18 coming from the local firms, 26 from the regional firms, and 7 from the global firms.

Of the total observations, the maximum WACC was 12.3%, and the minimum was 5.0%.


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