Risk adjusted WACC

Last updated: 16.03.2016

Risk adjusted WACC is the adjusted WACC which is used to evaluate projects exposed to different systematic business risk than other activities currently undertaken by the company.

The steps used in calculation are (41):

1. Find beta of traded company with similar business characteristics (and therefore similar systematic business risk) in the industry where the company intends to diversify.

2. Use formula below to calculate unlevered beta to remove the effect of financial risk (resulting from specific capital structure) of the compared company.  βu will then show only the systematic risk present in the market (industry). 

 

βu – unlevered beta

βi – beta of the comparable company

 

3. Relever the beta to the existing (or expected) capital structure using the formula below to reflect the financial risk of the considered company:

 

(41)

4. Calculate WACC using new parameters.

 

The biggest problem results from the fact that it is difficult to find companies with similar operating characteristics. 

 

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Used sources:

41. Unlevered beta (online).  Citation date: 1.2.2016. Available from www: https://www.educba.com/unlevered-beta/



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