Module II· Interview Essentials — ValuationIntermediate
Question
How do you defend a WACC assumption of 8% in an interview when the MD suggests '7%'?
Answer
Diplomatic defense
'I used a WACC of 8% based on 8–10 peer-group comps and the following inputs: Rf 2.5%, ERP 6%, β 1.1, tax rate 30%, target D/V 25%. That gives CoE = 9.1%, cost of debt 4% × (1−30%) = 2.8%. WACC = 0.75 × 9.1% + 0.25 × 2.8% = 7.5%.
I conservatively rounded up to 8% to reflect a middle-market premium for the illiquidity.' On the MD's suggestion of 7%: 'To get to 7%, I'd have to either cut beta to 0.9 — lower than every peer — or lower the ERP to 5%, which is below the Damodaran median. Which of the inputs specifically would take you to 7%?' Key defense points:
- Show the inputs explicitly.
- Calibrate to market-standard sources (Bloomberg, Damodaran).
- Push back not aggressively, but with questions.
Deep diveShow more details
Pitch tip
MD WACC suggestions are often 'sandboxes' — they test whether you can defend the mechanics. Don't just cave.