My guess is that the WACC would change, leading to a higher or lower discount. But I'm not 100% sure because the DCF is a measure of the intrinsic value of a business.
Merci!
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This is presumably already factored into the WACC. The equity, preferred, and debt investors all have an expectation of performance and this impacts their required weight of return.
Performance is reflected in the forecast of a company's financials (and thereby their unlevered free cash flows).
Performance is reflected in your revenue/cost projections which trickle down to your free cash flows. WACC is not a measure of performance. It is "the weighted average cost of capital". In other words, how much it costs you to raise capital through equity & debt.
Edit: I just realized that you have a track record of asking basic questions to which you could find the answer with a simple google search. For sure stop doing that lol
I didn't say that WACC was a measure of performance, but clearly your understanding of WACC is poor if you don't think that expected performance is reflected in WACC.
Take Company A that sells office supplies. Company A is expected to grow revenue at 10% annually for the next 5 years with expenses increasing by 4% annually. Company B also sells office supplies, and is identical to Company A except that it is expected to grow revenue at 1% annually and expenses will increase by 4% annually. Which company will have a higher WACC?
I think his understanding is just fine...let's have a look at the WACC, shall we? It's a weighted average of all your costs of capital. Let's make it simple and narrow it down to cost of equity and cost of debt. Cost of equity is based on...the CAPM, so essentially 3 things: -rf: nothing to do with the particular firm's expected performance -equity risk premium: again, unrelated -beta: a measure of risk/volatility versus a benchmark... Not expected performance, just how much the stock moves given a general market move. Take for example many biotech firms expected to do very well but have a high beta. To sum up on the Ke side: nothing regarding expected performance
Cost of debt: based on various indicators of credit worthiness, interest coverage ratios, existing cap structure, etc. SOME aspect of expected future performance I suppose, but not really central
Final factor in your wacc: cap structure, so unrelated to expected performance
It reflects the risk of the cash flows. Not I understand the line of thinking that if a business is expected to do shit in the future, the risk of their cash flows would go up hence higher wacc but I don't think that's really observed in practice unless it's an extreme case where your risk of default skyrockets. If you proxy Kd using a weighted average of the interest rates on all the tranches of debt and the company is suddenly expected not to do as well as expected in the next 3 years, but also doesn't take on any new debt, their cost of debt will remain unchanged.
Edit: MLE aka young bruised ego prefers to MS anyone who proves him wrong so no solution for him LOL
Uh...no. YOUR understanding of WACC is poor. If you expect Company A and B to be similar fundamentally, but A has expected lower revenue growth & smaller gross margins, that gets taken into account with top-line projections. Why the fuck would you double count that by factoring in a smaller/higher WACC?
Do you know what WACC is? It's the opportunity cost investors expect to be compensated by when they finance your firm/operations.
WACC - Weighted Average Cost of Capital. There's going to be some sort of spread between risk-free investments and your company, seeing as WACC is a reflection of the risk/ability of your company to pay back its obligations/perform for its shareholders. That has to do more with capital structure, solvency...etc. You get the point.
So in reply to OP: it's reflected in your forecasts, growth rates etc
That only holds if new debt is raised, and assuming that the company will do so badly that it falls above a certain credit worthiness threshold. Those are rather big assumptions. Bottom line is you keep hammering on that one scenario when the general truth is that a poor forecasted performance will be primarily reflected in revised top/middle line assumptions. If someone asks you how you reflect poor forecasts in a model, do you reply higher wacc as the first thing that crosses your mind? Common mon ami...Perhaps an ER professional can enlighten us as to whether they would also revise their wacc. I highly doubt that is the case.
Besides, people pull wacc out of their ass 99% of the time
+1
By no means an expert, but doesn't it also have to deal with the FCF growth rate or EBITDA multiple when calculating the terminal value?
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