What is the WACC we – analysts – should be using to value a corporate Free Cash flow, and ultimately a corporate Enterprise Value – EV – ?
Since there is a credit spread curve, do we need a WACC curve, or can we resort to using one single WACC ?
Also, we all know that – theoretically – Equity BETA should be deleveraged and re leveraged as a function of corporate financial leverage dynamics. Should we be using one-single Equity BETA to compute the cost of Equity, or do we have to build a Beta Curve ?
Lets’s examine a few examples, to better measure and understand this twin challenge.
Here are the WACC distribution (the top image) and Equity BETA distribution (the bottom picture) for 4 major and global retailers : WALMART, THE KROGER, AHOLD and CARREFOUR.
- 1-year distribution in blue
- 5 year distribution in red
- 10-year distribution in green
- First observation : WALMART is unique : a relatively narrow bandwidth both in its BETA as well as in its WACC
- Second observation : in any case, what a world of difference between those corporates.
- Third observation : what a world of difference between between 1-year, 5-year and 10-year WACC and BETA distribution for every corporate.
- Final observation : even for a given year, what a broad distribution in the Equity BETA itself.
Can we answer the original question : for better issuer valuation, should we use a WACC and a BETA curve ? Probably so.