"Walk me through how you'd adjust WACC for an international deal" is a common prompt in valuation and private equity interviews, and it's rarely answered well — most candidates either stop at a single country risk premium add-on or forget the currency step entirely. Here's the full sequence, worked through step by step with real numbers.

Step 1: Start With a Standard CAPM Cost of Equity

Cost of Equity (USD) = Risk-Free Rate + β × Equity Risk Premium

Using a US risk-free rate of 4.0%, an equity risk premium of 5.5%, and a levered beta of 1.10 from comparable public companies: Cost of Equity = 4.0% + 1.10 × 5.5% = 10.05%. This is your starting point — a cost of equity that only reflects home-market systematic risk.

Step 2: Layer In the Country Risk Premium

Country Risk Premium = Sovereign Bond Spread × (Country Equity Volatility / Country Bond Volatility)

Take the target country's USD-denominated sovereign bond spread over US Treasuries (say, 2.5%) and scale it by the ratio of that country's equity market volatility to its bond market volatility (say, 1.3x): Country Risk Premium = 2.5% × 1.3 = 3.25%. Add this directly to the base cost of equity: 10.05% + 3.25% = 13.30%.

Step 3: Convert to the Cash Flow Currency

If the DCF's cash flow forecast is built in local currency, the discount rate needs to be as well. Using the Fisher relation with local inflation of 6.0% and USD inflation of 2.5%:

Cost of Equity (Local) = (1 + Cost of Equity (USD)) × (1 + Local Inflation) / (1 + USD Inflation) − 1

(1 + 13.30%) × (1.06) / (1.025) − 1 = 17.17%. Skipping this step — and discounting local-currency cash flows at the USD-denominated rate from Step 2 — is one of the most common mistakes in this type of question, because 13.30% and 17.17% look close enough to pass a casual sanity check but represent two different currency assumptions.

Step 4: Add an Illiquidity Premium

If the target isn't a liquid, publicly traded business — a subsidiary, a private company, a minority stake — add an illiquidity premium to compensate equity holders for the difficulty of exiting the position. A 1.5% add-on brings the fully adjusted cost of equity to 18.67%.

Step 5: Assemble the Final WACC

WACC = E/(D+E) × Re + D/(D+E) × Rd × (1 − Tax Rate)

At a target Debt/Equity ratio of 0.50 (E/(D+E) = 66.7%, D/(D+E) = 33.3%) and a pre-tax cost of debt of 8.0% taxed at 25% (after-tax cost of debt = 6.0%): WACC = 66.7% × 18.67% + 33.3% × 6.0% = 14.45%.

The full version of this case — including the given data table and a completed model answer — is worked out in International WACC.

How This Differs From a Leverage-Only WACC Adjustment

It's worth distinguishing this from the more common "what if the company took on more debt" WACC question, which unlevers and relevers beta using the Hamada equation rather than adjusting for country or currency — covered in WACC with Leverage. And once you have a finished WACC, interviewers often follow up by asking how sensitive the valuation actually is to that number — a question worked through in Sensitivity Analysis: WACC vs. Terminal Growth Rate. Knowing which lever you're being asked to pull — geography, capital structure, or sensitivity — is often the real test behind these questions.