Divisional WACC Calculation (NOTE) PDF

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Divisional WACC Calculation Notes...

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Calculating the WACC for a Division

The Pure Play Approach: 1. Find a public company that is in the same industry as the division. This company would be considered a “Pure Play.” 2. Calculate beta for the Pure Play company using publicly available information. 3. Unlever the beta in the pure play company to a no-debt basis. 4. Relever the beta to the same debt-to-equity ratio as the company in which the division is a part. Use this calculated beta as an estimate for the beta of the division. 5. Use the calculated beta in CAPM to calculate the required rate of return on equity for the division. 6. Calculate the division WACC using the company after tax cost of debt and the estimated required rate of return on equity for the division from step 5.

The Variation in Sales Approach: 1. First calculate the company WACC 2. From a time series of revenues, calculate the Coefficient of Variation (CV) for each division and the company as a whole. 3. Calculate the CV ratio for each division, which is the CV for a division divided by the CV for the company. 4. Multiply the CV Ratio times the company WACC to calculate the Division WACC....