estimation of the WACC for an emerging country firm

[Question]

1. When estimating the percent of debt and equity in the capital structure, the market value of the firm's debt and equity should be used, not the book value.
2. The beta will be needed to obtain the cost of equity capital in the CAPM. The beta should be estimated for the company by regressing the company's returns against a well diversified global index, not the local market index.

Are both statements correct?

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[Answer]

1. Incorrect. The debt and equity weights from a global industry index should be used, not the weights for the firm. Firms in emerging markets often use debt conservatively and this results in lower leverage ratios than for firms in the same industry in other countries.
2. Incorrect. An industry beta for the firm's industry should be estimated, not an individual firm beta. It is correct however that a well diversified global index, not the local market index, should be used.