How can you calculate the WACC of a private company?

To calculate the Weighted Average Cost of Capital (WACC) for a private company, the most reliable method is often to calculate the WACC for a comparable public company. This approach is effective because public companies have more readily available data, including market capitalization, debt levels, and the costs associated with equity and debt financing. By analyzing a public company's WACC that operates in the same industry and has a similar risk profile, one can derive a useful benchmark for the private company's WACC.

This method allows for adjustments based on differences in leverage, risk, and capital structure that may exist between the public and private entities. Once the WACC for the public company is determined, it can be appropriately modified to reflect the private company's specific circumstances, providing a more accurate estimate of the private company’s cost of capital than purely theoretical or historical methods.

The alternate methods mentioned may have limitations: relying on historical averages may not reflect current market conditions, estimating future performance can be subjective and uncertain, and arbitrarily setting WACC to a standard figure like 10% lacks a solid analytical foundation. Therefore, using the WACC of a comparable public company is the most structured and empirically supported approach for a private company's valuation context.