Module II· WACC & Capital StructureAdvanced
Question
Which five most common WACC mistakes must you avoid in an interview?
Answer
- Book values instead of market values for the weights → an under-leverage bias for cash-rich companies.
- Coupon rate instead of yield-to-maturity as the cost of debt → ignores market changes.
- Effective instead of marginal tax rate → understates the tax shield.
- Current instead of target capital structure → WACC reflects temporary distortions.
- Single-country WACC for an international group → ignores the country risk premium.
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Pitch tip
If an MD asks 'Where could you go wrong in WACC?', list these five points. Bonus point: 'In an NOL period I temporarily adjust the tax rate — otherwise the tax shield is double-counted in WACC and FCF.' Shows structural understanding.