Hello everybody,
What do you do when you do a DCF for a company that realizes 50% of its activity in France and 50% of its activity in the US ? Because in this case you have 2 different WACCs. Do you separate each year's cash flow in 2 parts (France/US) before you discount it ?
THANK YOU for your help !
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Depends what currency the company's cash flows are projected in. If it's projected in USD you can use a U.S. based WACC. If it's Euros you can use a French WACC. Usually brokers would not project a company's future cash flows in 2 separate currencies.
In this case, because the company operates in two developed and mature markets, it doesn't really make a difference. If half of your revenues were in Brazil, for example, you would have to do a sum-of-the-parts build up with Damodaran risk premiums, weighted by cash flow contribution.
I would offer the opinion that your WACC should capture any inherent operational risk that the company faces. While WACC can be thought of a proxy for the riskiness of the company, the true definition is the cost of raising capital from an astute, rational investor(applies for both debt/equity).
An equity investor is not oblivious to the fact that the company derives its revenues from two different geographies, and will likely be baked into the CAPM formula via its beta or as an additional risk premium as seen fit. The same logic applies with the cost of debt. If creditors believe that a company has a higher chance of default due to operational risk, they will require a greater yield on their debt to compensate for this.
This is ass backwards. The WACC is a fiction. There is no WACC on an open market. You have to estimate it, at least the equity component (why we have CAPM). So it's not "inherent" in the value - you have to bake it in. Country risk is not in beta, though you're right that it's likely in the cost of debt (i.e., yield on the national debt). To bake it into the equity component, you need to utilize an international cost of capital (ICOC) model. Damodaran is one model (very intuitive) but there are others.
CAPM indicates that you are not compensated for idiosyncratic risk, which in theory should include country risk as there are no market forces that says you have to operate in a certain jurisdiction. While I agree that in certain industries its common practice to add a premium for instability/uncertainty(i.e. metals & mining), there is no "right" premium aside from what has been used empirically by industry experts.
We both agree on the idea that WACC is a fictitious number that serves little value by itself, and I think our discussion highlights that its really closer to an art than science. While I'm an academic at heart, I do think that for practical purposes more is not necessarily better/more precise. Sometimes its just not practical to value a business using multiple WACCs given how global businesses are today, when a lot of the potential risks can be shown through a sensitivity analysis.
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