TABLE OF CONTENTS Recently we were discussing how people use and obtain the discount rate to appraise investment projects and to value firms. We were skeptical that practitioners would take into account market values or any value at all. We decided to contact people in the field. We have transcribed some excerpts from the statements of two financial officers. One of the officers is from Latin America, where he works with a multinational firm that is a partner of an important U.S. firm, which is developing an infrastructure project in the Philippines. The other officer is from a European firm that has worldwide operations. The European financial officer is posted in Japan.
The European executive reported the following:
Cost of equity e is fixed, based on risk-free interest (Government bonds)+some adjustment to reflect risk (based on our impression of the risk).
Interest rate on debt d is the interest rate on debt we can obtain for a specific project in a specific country.
WACC is then calculated as
| (A11.1) |  |
where D% and E% are the (book value) portions of financing done with debt and equity, and T is the company tax rate in the country where the project is to take place. (I think at least this last point is rather questionable).
The executive from the Philippines had the following to say:
With respect to WACC, it is difficult in practice to follow what finance textbooks suggest, mainly because the variables for its...
