Aswath Damodaran 194
Estimating a hurdle rate for the theme park
! We did estimate a cost of equity of 9. 12 % for the Disney theme park business
in the last chapter, using a bottom-up levered beta of 1. 0625 for the business.
! This cost of equity may not adequately reflect the additional risk associated
with the theme park being in an emerging market.
! To counter this risk, we compute the cost of equity for the theme park using a
risk premium that includes a country risk premium for Thailand:
- The rating for Thailand is Baa 1 and the default spread for the country bond is
- 50 %. Multiplying this by the relative volatility of 2. 2 of the equity market in
Thailand (strandard deviation of equity/standard devaiation of country bond) yields
a country risk premium of 3. 3 %.
- Cost of Equity in US $= 4 % + 1. 0625 ( 4. 82 % + 3. 30 %) = 12. 63 %
- Cost of Capital in US $ = 12. 63 % (. 7898 ) + 3. 29 % (. 2102 ) = 10. 66 %
Adds a risk premium to the cost of equity to reflect the additional risk of
investing in an emerging market...
