Which Cost Of Capital? - Acquiring A Business...Or Commercial Real Estate

[Bryan Hancock]

So I am busy watching a series of videos on Academic Earth about valuation. The instructor is from NYU and there is some great content in the lecture series.

One of the points the instructor harped on when he was discussing companies acquiring other companies is that the discount rate should be selected or matched with the riskiness of the cash flows for the acquired company. He argued that using the WACC of the acquiring firm is incorrect because it would systematically overvalue the acquisition in most instances because the acquiring firm is stronger financially.

What are your thoughts on this? This whole idea decouples the cost of capital from an investor-centric view IMO. If my debt costs me X and I demand Y for my equity I generally just do a WACC computation to figure out what I would use for a quick model for value. It seems like this would be inaccurate given the prof's line of reasoning.

Why wouldn't you use your own personal costs for valuing acquisitions of either real estate or companies you purchase? Why use the risk associated with the acquired firm?

Thoughts?