How would you estimate the WACC for an unlisted Indian mid-sized company?
What the interviewer wants to hear
- Risk-free rate from long-term government bond yields in the same currency
- Beta from listed peers, unlevered and relevered at target capital structure
- Equity risk premium and possibly a size or company-specific premium
- Cost of debt from current borrowing rates, after tax
- Weights from target or peer capital structure at market values
Model answer
I would use CAPM for the cost of equity. The risk-free rate comes from the 10-year Indian government bond yield, because cash flows are in rupees, so currency and inflation are consistent. Since the company is unlisted, it has no beta of its own, so I collect betas of listed peers, unlever them using each peer debt to equity ratio and tax rate, take the median, and relever at the target company capital structure. I then add an equity risk premium for India, and often a small size or company-specific premium for an unlisted mid-sized business, explaining the judgment. For cost of debt I use the rate it currently pays or would pay on new bank loans, not old historical rates, and apply the tax shield. The weights should reflect a target or peer-based capital structure at market values, not book values. Finally I show a WACC range and test valuation sensitivity to it.
Can you answer it under time pressure?
Take a timed hard round and get scored on every answer.
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