How to Calculate Weighted Average Cost of Capital for Company operating in 2 countries?

Question

Say, for example, we have a company that operates in two countries (A & B).

Country A:
Computed Weighted Average Cost of Capital is: 10%
Market Value Cost of Capital: $10,000*

Country B:
Computed Weighted Average Cost of Capital is: 12%
Market Value Cost of Capital: $10,000*

* The weight distribution of all sources of capital used to compute the Market Value Cost of Capital in each country is identical. The total Market Value Cost of Capital is identical in both countries as well.

Any suggestions on the approach analysts typicaly use to compute the the overall company weighted average cost of capital would be greatly appreciated.

Serious replies only please.

Answer 1

The answer is 11% because capital allocation is equal. However, this is purely a classroom exercise that is not commonly used in the real world.

I have seen attempts to put businesses into different WACC pools. That's fine and good that different projects should return different projects. If you're doing great if you're making 10% ROIC in the US, but you wouldn't be recouping the cost of capital if you only got 10% in Nigeria. That's not the issue. The issue is more on the financing side.

For public companies, WACC is calculated using market weighted cost of capital for debt and equity. Equity is calculated using the CAPM formula, which uses the "beta" for the stock. The stock's beta will have already included the intrinsic risk of the operations in another country. In the example that you provided, the WACC for country A may be 10% - but how can you get to that? You'd have to fudge the beta downward to get the cost of equity. And how do you know how much to fudge downward. The country may be lower risk, but how much lower risk. Also, how do you calculate the industry risk. It's one thing to operate a utility, but what about a gold mine? The bottom line is that you've now made multiple assumptions on your WACC and it's starting to be "made up".

The second thing is that financing is not necessarily always in discreet pools. Sure, you can raise debt to be associated with specific projects - that's easy. But what about the equity. You've raised a pool of equity - let's say $100m. So if you keep it in a Country A account earmarked for the Country B, it's worth less value because the project has a higher WACC? That's not right. Or Project B pays a dividend to Project A and the same dollar suddenly becomes more valuable because of the transfer into a lower WACC holding company?

Nope. Generally you only have 1 WACC per company.