Hi WSO,
If I risk adjust revenues (estimating a % likelihood that revenues will come to fruitition, and then multiplying the potential revenue by its assumed likelihood), am I "double-counting" if I risk-adjust WACC (upwards)?
I then go on to build a DCF, discounting using WACC.
From an academic standpoint you need to use a the expected value of the cashflows and use a WACC based on systematic risk.
So if you were to take the expected value of cashflows (probability of success X revenue when succesful) you shouldn't increase the discount rate you got using CAPM or whatever.
I'm pretty sure that practitioners sometimes adjust the discount rate, but if you believe what matters is systematic risk, then you shouldn't do that.
Ratione sequi voluptas adipisci ducimus sapiente esse. Fugiat occaecati iste est nulla eum magnam. Praesentium eos nihil numquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...