Module II· Sum-of-the-PartsIntermediate
Question
How do you choose segment-specific WACCs for an SOTP DCF?
Answer
Pure-play WACC per segment:
- Segment-specific beta — unlever from pure-play comps, relever to the segment's capital structure.
- Segment-specific cost of debt — the sector spread for a standalone valuation.
- Segment-specific capital structure — either the industry median or the group default.
Deep diveShow more details
Example
industrial segment WACC 8.5%, software segment WACC 11%, real estate WACC 6%. For diversified groups the group WACC is a 'blend' of the segment WACCs — an SOTP DCF with segment WACCs is cleaner than a single-WACC DCF.
Pitch tip
'Segment WACCs range 6–11% reflecting risk profile differences; consolidated WACC 8.8% understates variation across business units.'