WACC Analysis Questions
Hey all,
Two quick questions. I am running a DCF and am looking to fine tune some of the assumptions in the WACC analysis. Specifically, what are the best assumptions to use for "Size Premiums" and the "Market Risk Premium"? Any assistance here would be appreciated
What company? All depends on the industry
Thanks for the quick reply! Without releasing the name, it is a small manufacturing company (nonpublic)... For equity risk premium, I know some people use Damodarans website but I see he lists a handful you can choose from. I still don't know where I'd get size premium from however
I believe there are some specific guides (I think Duff & Phelps has a report they update every year) that will give you broad ranges for size premium based on the company's market cap or implied market cap. I would consult with your senior bankers for guidance on this. Size and liquidity discounts are definitely more art than science in my experience.
ERP can likely use 6% and just say it’s an assumption. Hard to get any more precision.
Size premium... I mean if you really want to go at it you can look up the Fama French model and use some small-minus-big beta... you could ignore it completely... or you could just make one up that seems reasonable (over 100bps is going to raise eyebrows)
Duff & Phelps has a valuation handbook is the most commonly used IMO for cost of capital stuff.
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