Aswath Damodaran 244
The Hurdle Rate
! The analysis is done in real, equity terms. Thus, the hurdle rate has to be a
real cost of equity
! The real cost of equity for Aracruz, based upon
- the levered beta estimate of 0. 7576 (for just the paper business)
- the real riskless rate of 2 % (US Inflation Indexed treasury bond)
- and the risk premium for Brazil of 12. 49 % (US mature market premium ( 4. 82 %) +
Brazil country risk premium ( 7. 67 %))
Real Cost of Equity = 2 % + 0. 7576 ( 12. 49 %) = 11. 46 %
Everything is done in real, equity terms.
Note that we are using the levered beta for just the paper business (and not the
levered beta for Aracruz as a whole).
