The Application Differences of WACC in Firm Valuation: Technology Industry versus Manufacturing Industry

Xinhe Tian

doi:10.54097/790xn248

Authors

Xinhe Tian

DOI:

https://doi.org/10.54097/790xn248

Keywords:

WACC; applicability differences; technology industry; manufacturing industry.

Abstract

This paper reviews how the Weighted Average Cost of Capital (WACC) functions across different industries, focusing on a comparison between the technology and manufacturing sectors. It finds that several assumptions behind WACC often do not hold in the tech industry. These firms rely heavily on intangible assets, face higher unsystematic risks, and operate in more uncertain environments. By contrast, manufacturing companies tend to have more predictable cash flows and capital structures that better fit WACC-based models. In addition to highlighting these differences, the paper summarizes several methods proposed in the literature to adjust or improve WACC applications under uncertainty conditions. These include scenario-based forecasting, Monte Carlo simulation, and real options analysis. This paper shows that WACC is not equally applicable across all sectors and that valuation tools must be adapted to reflect the specific characteristics of each industry. this research offers industry-related guidance for financial analysts and valuation practitioners. Such adjustments may contribute to more accurate investment decisions.

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