A Strategic Approach to the Estimation of WACC

Marina Ward √Ödlandsvik & Henriette Andrea Stead Gjefle

Student thesis: Master thesis


This master's thesis aims to investigate how theoretical methods, as well as internal, external and industry specific factors affect WACC, and the significance it has for SalMar's underlying value. The motivation behind the master's thesis is previous experiences in the implementation of traditional valuations. We have learned that the estimation of WACC is a challenging task and plays a fundamental role in the valuation of a company. The theoretical framework is suffering from ambiguity and inconsistency, which creates room for own assumptions that can lead to estimation errors. We believe that the estimation of WACC in traditional valuation methods does not adequately illustrate the impact of strategic factors. Based on the above, the analysis of WACC is twofold, of which part one consists of a theoretical estimation of WACC, a valuation using the DCF model and a subsequent sensitivity analysis. The DCF model estimates a share price as of December 29, 2017 of NOK 311,4. The subsequent sensitivity analysis gives a share price in the interval NOK 228-481, which corresponds to a spread in the share price of 111,1 %. This supports our arguments regarding that the theoretical estimation of WACC creates great scope for subjectivity, which entails critical deviation in WACC, and in the underlying value of the firm. The second part of the analysis consists of a strategic estimation of WACC. Through the fundamental analysis, we have identified strategic factors that will affect the components of WACC. These findings support an estimation of two different WACCs in the budget and terminal period. This is mainly due to findings in the fundamental analysis, which disclose that strategic factors vary over time and will impact WACC differently in the short and long term. Based on the above, the estimated share price is NOK 222,6 on December 29, 2017. By comparison, Oslo Stock Exchange shows that the share price at the same time was NOK 246,8. This indicates that traditional valuation methods tend to overestimate the stock price. By adding strategic factors to WACC, we get a share price that better reflects the market's expectations of the company and its underlying value.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages163