Aswath Damodaran 234
The Disney Theme Park: The Risks of International
Expansion
! The cash flows on the Bangkok Disney park will be in Thai Baht. This will
expose Disney to exchange rate risk. In addition, there are political and
economic risks to consider in an investment in Thailand. The discount rate of
10. 66 % that we used reflected this additional risk. Should we adjust costs of
capital any time we invest in a foreign country?
# Yes
# No
Depends on whether this risk is viewed, from the perspective of Disney
stockholders, to be diversifiable (in which case, it should be ignored) or non-
diversifiable (in which case, it should lead to a higher discount rate)
For Disney, which is primarily institutionally held, I would assume that the risk
is diversifiable to my stockholders, and assess no extra premium.
If I wanted to assess an extra premium, I would go back and use the risk
premium for Thailand in the CAPM, and come up with a higher cost of equity
and capital for this project.
If you were a large stockholder in the firm and you were not well diversified, you
would probably want an even larger premium.
