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Technical interview about M&A: WACC formula for a private company

M&A M&A Case Valuation
New answer on Apr 30, 2024
3 Answers
2.4 k Views
Richard asked on Apr 10, 2021

I have to prepare for an interview in the transaction and M&A area of a Big4, and I have been told that they ask technical questions related to company valuation. In particular there is a question I have when calculating the WACC, and more specifically the E and D weights of the WACC formula.
The theory says that:

  • E= market value of equity
  • D= market value of debt

and then the WACC=ke * E/(D+E) + kd * (1-tax rate) * D/(E+D)

Well, if you ask me about a private company, it is not easy to get the market value, as there may not necessarily be comparable companies or there is no public rating that applies to the company in question. Therefore, what is called "market value" does not exist or is very difficult to obtain, and it is necessary to look for an alternative way to calculate it.

I have read in various sources that there are people who calculate E+D as the total sum of the Assets, which, as it has to be the total sum of the liabilities, then by default we have to calculate

  • E=balance sheet value of equity
  • D=balance sheet value of short-term liabilities + long-term liabilities.

But there are specialists who say that this is not correct, not even as an approximation.
That said, what would be the answer to questions in a technical interview?

For example, would it be wrong for me to say this?

  • E= balance sheet value of equity
  • D= balance sheet value of net financial debt, i.e. long-term financial debt + short-term financial debt + credit facilities - cash.

Is that answer correct or are there other criteria for calculating E and D values?

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Clara
Expert
Content Creator
replied on Apr 12, 2021
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

I agree that this seems more complicated than what you are going to find in such interviews. What you need to know how to do is:

  • NPVs, knowing the:
    • r, disccount rate
    • C, capital
    • n, number of years
    • *all of that will be given
  • NPV in perpetuity, for which the formula is simpler since you don´t have the years

Hope it helps!

Cheers,

Clara

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Ian
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replied on Apr 11, 2021
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi Richard,

You're overcomplicating quite significantly for a case. In most cases, you'll simply have to calculate an NPV off of current and projected future cash flows. You can use anything the case gives you (cash flow, profits, net income, x products times x price, etc.)

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Cristian
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Content Creator
replied on Apr 30, 2024
#1 rated MBB & McKinsey Coach
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Clara gave the best answer

Clara

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