How would you estimate the WACC for a private company according to the material?

• A. Look at public comps to derive beta and cost of equity; a small premium may be added
• B. Compute using only the company’s debt yield
• C. Use the current stock price to back into WACC
• D. Ignore beta and use a fixed 5%

Answer: (A)

Estimating WACC for a private company relies on proxying market data from similar public firms. Since you can’t observe a private company's beta or stock-based cost of equity directly, you use public comps in the same industry to infer risk and returns. Derive cost of equity with CAPM: risk-free rate plus beta times the equity risk premium. You can unlever and relever the beta to reflect the private firm’s target capital structure, or adjust a levered beta from comps. This provides a realistic cost of equity for the private company. Then blend this with the cost of debt, using the yields from comparable public debt and applying the tax shield, based on the private company’s target mix. A small liquidity/size premium is commonly added to account for the private status. The other options are less appropriate: debt yield alone misses the equity component, using a stock price isn’t possible for private firms, and a fixed 5% ignores market risk and leverage.