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sir if we acquire another business which has a different business risk compared to group’s overall business risk. But if that small newly acquired business is not going to contribute in a massive way to the group’s earnings, then the WACC will continue to remain the same right sir?
However if that new acquisition is massive in scale and expectations are weighing on it heavily, then perhaps we will have to use Risk-adjusted WACC for the whole group and new acquisition going ahead in the future, is that correct sir?
There are two separate things.
As far as the business risk is concerned then the new investment should always be discounted at a rate determined by the level of risk in the new project. If, for example, the risk of the new project is higher than the existing risk of the business then it must be discounted at a higher rate regardless of how big or small the investment is.
As far as the financing is concerned, then if there is a significant change in the gearing we should take an APV approach.
It is only if there is no significant difference in the business risk and no significant change in the gearing that we would then discount at the existing WACC.
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