Module II· WACC & Capital StructureAdvanced
Question
How do you treat WACC in an SOTP valuation with multiple business segments?
Answer
Mechanics
The group WACC is the weighted average of the segment WACCs — but for an SOTP you need segment-specific WACCs.
Method
- Find pure-play comps for each segment — the auto division via pure auto suppliers, the healthcare division via pharma comps.
- Unlever the segment-specific beta and relever it with the group capital structure (or with the segment-typical structure when segments are valued separately for spin-off scenarios).
- Derive the segment cost of debt from pure-play bonds.
Deep diveShow more details
Consequence
A diversified group often has a 'wrong' group WACC because segments with different risk are blended.
Pitch tip
'A group WACC of 8.5% hides a segment range of 6.5–11.0% — SOTP shows a more honest valuation.'