Module II· WACC & Capital StructureIntermediate
Question
How do you calculate WACC for a project-finance or asset-heavy business?
Answer
Mechanics
Project finance has higher leverage (D/E 3.0–5.0 typical) and lower equity risk (cash flows from long-term contracts, regulated tariffs).
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Consequence
A very low WACC, often 5–7%. Modeling:
- Use the project-specific capital structure, not the group average.
- Project-finance bond YTM or bank-loan pricing as the cost of debt.
- A reduced beta (~0.5–0.7) due to contractual protection.
- Tax treatment: project SPVs often have their own tax positions (no group tax sharing). Examples: offshore wind farms, toll-road concessions, and regulated utility networks.