Consult Damodaran when building WACCs for international companies

Jesse Mucciarone (Cliffs Natural Resources) recently posted a question in LinkedIn’s Valuation group that received some useful responses: “In building a WACC for an international company, what would be the correct inputs? The subject Company is based in Europe, the deal will be financed in U.S. dollars.”

Anton Lezhja (Deloitte Albania) responded:

“As an appraiser working in Central and Eastern Europe I would draw your attention in several aspects you need to address when building WACC.

1) Risk free rate: Depending on which country in Europe the company is, you may have Rf rate of the country (in case there are long term government bonds of that country, either in local currency or in EUR, or USD) or of another country (usually 20 yrs German bonds, but U.S. bonds can also be used).

2) Currency: more important than the transaction currency it is the currency in which the cash flows are generated.

3) Country risk: Damodaran is a good source for the country risk unless you want to build it yourself.

4) ERP: Damodaran and SBBI are good sources for it. Damodaran updates in his website the ERP every month.” Mark Krickovich (MK Appraisal) and Rod Burkert (Burkert Valuation Advisors, LLC) also suggest consulting Damodaran. “IMO, I think the cost of capital should be built up in terms of either (1) the investors' required rate of return based on the home country of the investors ... with specific weight given to the investment's riskiness or (2) the investment's required rate of return in its home country ... with specific weight given to the currency risk of the investors,” Burkert adds.

Added note: BVR has signed an exclusive agreement with Business Monitor International, the London-based country and industry risk analysis organization, to offer their proprietary research in the United States. Look for their reports very soon on www.bvresources.com.