Professional Documents
Culture Documents
COST
OF
CAPITAL:
MISUNDERSTOOD,
MISESTIMATED
AND
MISUSED!
Aswath Damodaran
a.
b.
c.
d.
e.
f.
Cost of Capital
Cost of Equity
Risk free
Rate
Risk Premium
Weight of
equity
Cost of Debt
Risk free +
Rate
Weight
of Debt
Default Spread
No risk subsidies
If you use the cost of capital of the
company as your hurdle rate for all
investments, risky investments (and
businesses) will be subsidized by
safe investments.(and businesses).
No debt subsidies
If you fund an investment
disprportionately with debt, you
are using the company's debt
capacity to subsidize the
investment.
Cost of Equity
Weight of
equity
Tax benefit is
here
Weight
of Debt
At some level of
borrowing, your
tax benefits may
be put at risk,
leading to a lower
tax rate.
The trade off: As you use more debt, you replace more expensive equity with cheaper debt
but you also increase the costs of equity and debt. The net effect will determine whether
the cost of capital will increase, decrease or be unchanged as debt ratio changes.
The optimal debt ratio is the one at which the cost of capital is minimized
<-5%
25.00%
-5%
-
0%
0
-5%
20.00%
5
-10%
15.00%
>10%
10.00%
5.00%
0.00%
Australia,
NZ
and
Developed
Europe
Emerging
Markets
Canada
Japan
United States
Global
Assets in Place
Growth Assets
Liabilities
Debt
Equity
Present value is value of the entire firm, and reflects the value of
all claims on the firm.
Explicit (Senario
analysis or
Simulation)
Country Macro
Risk Exposure
Beta
get discounted at
Risk-adjusted
Discount Rate
to get
Probability of
discrete event
Value
And probability
adjusted to
arrive at
Value if event
occurs
Adjusted Value
2.
3.
4.
5.
6.
It
is
not
the
cost
of
equity:
There
is
a
Cme
and
a
place
to
use
the
cost
of
equity
and
a
Cme
a
place
for
the
cost
of
capital.
You
cannot
use
them
interchangeably.
It
is
not
a
return
that
you
would
like
to
make:
Both
companies
and
investors
mistake
their
hopes
fore
expectaCons.
The
fact
that
you
would
like
to
make
15%
is
nice
but
it
is
not
your
cost
of
capital.
It
is
not
a
receptacle
for
all
your
hopes
and
fears:
Some
analysts
take
the
risk
adjusCng
in
the
discount
rate
too
far,
adjusCng
it
for
any
and
all
risks
in
the
company
and
their
percepCon
of
those
risks.
It
is
not
a
mechanism
for
reverse
engineering
a
desired
value:
A
cost
of
capital
is
not
that
discount
rate
that
yields
a
value
you
would
like
to
see.
It
is
not
the
most
important
input
in
your
valuaCon:
The
discount
rate
is
an
input
into
a
discounted
cash
ow
valuaCon
but
it
is
denitely
not
the
most
criCcal.
It
is
not
a
constant
across
Cme,
companies
or
even
in
your
companys
valuaCon.
11
a.
b.
c.
a.
b.
a.
b.
14
1.
2.
3.
No
default
risk
No
reinvestment
risk
15
0.00%
-2.00%
Japanese
Yen
Czech
Koruna
Swiss
Franc
Euro
Danish
Krone
Swedish
Krona
Taiwanese
$
Hungarian
Forint
Bulgarian
Lev
Kuna
Thai
Baht
BriCsh
Pound
Romanian
Leu
Norwegian
Krone
HK
$
Israeli
Shekel
Polish
Zloty
Canadian
$
Korean
Won
US
$
Singapore
$
Phillipine
Peso
Pakistani
Rupee
Venezuelan
Bolivar
Vietnamese
Dong
Australian
$
Malyasian
Ringgit
Chinese
Yuan
NZ
$
Chilean
Peso
Iceland
Krona
Peruvian
Sol
Mexican
Peso
Colombian
Peso
Indonesian
Rupiah
Indian
Rupee
Turkish
Lira
South
African
Rand
Kenyan
Shilling
Reai
Naira
Russian
Ruble
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
16
b.
c.
17
18
19
20
Normalize
Intrinsic
Leave alone
Inputs
Used
20-year
averages
for
T.Bond
rate
and
nominal
GDP
growth
+
Historical
ERP
(1928-2015)
Used
inLlation
rate
+
real
growth
rate
from
last
year
as
both
risk
free
rate
and
nominal
growth
rate
for
the
future.
Estimated
an
intrinsic
ERP
from
Baa
default
spread
on
3/27/15.
Used
current
T.Bond
rate
and
implied
ERP.
Set
nominal
growth
rate
=
current
T.Bond
rate.
Riskfree
Rate
ERP
Cost
of
equity
Expected
growth
rate
Value
4.14%
4.60%
8.74%
4.77%
$2,519
3.08%
5.11%
8.19%
3.08%
$1,957
2.00%
5.79%
7.79%
2.00%
$1,727
2.00%
5.79%
7.79%
2.00%
4.14%
4.60%
8.74%
4.77%
$2,296
The value of a business with expected cash flows to equity of $100 million next year
21
22
a.
b.
c.
d.
e.
a.
b.
c.
Arithmetic Average
Geometric Average
2.17%
2.32%
1965-2014
6.19%
4.12%
4.84%
3.14%
2.42%
2.74%
2005-2014
7.94%
4.06%
6.18%
2.73%
6.05%
8.65%
26
Pick
your
premium:
Analysts
can
pick
and
choose
the
risk
premium
from
the
table
that
best
reects
their
biases
and
argue
with
legal
jusCcaCon
that
it
is
a
historical
risk
premium.
Noisy
esCmates:
Even
with
long
Cme
periods
of
history,
the
risk
premium
that
you
derive
will
have
substanCal
standard
error.
For
instance,
if
you
go
back
to
1928
(about
80
years
of
history)
and
you
assume
a
standard
deviaCon
of
20%
in
annual
stock
returns,
you
arrive
at
a
standard
error
of
greater
than
2%:
Standard
Error
in
Premium
=
20%/80
=
2.26%
IntuiCvely
wrong:
The
historical
risk
premium
will
decrease
axer
bad
market
years
and
increase
axer
good
ones.
For
instance,
axer
the
2008
market
crisis,
the
historical
risk
premium
dropped
from
4.4%
to
3.88%.
27
Aswath Damodaran
Std Error
1.90%
14.40%
2.00%
1.70%
1.70%
2.80%
2.10%
2.70%
1.80%
2.70%
3.00%
2.10%
1.70%
2.60%
1.80%
1.90%
2.00%
1.60%
1.60%
1.90%
1.50%
1.40%
1.50%
28
Aswath Damodaran
29
Aswath Damodaran
30
Andorra
8.15%
2.40%
Italy
Austria
5.75%
0.00%
Jersey
Belgium
6.65%
0.90%
Liechtenstein
Cyprus
15.50%
9.75%
Luxembourg
Denmark
5.75%
0.00%
Malta
Finland
5.75%
0.00%
Netherlands
France
6.35%
0.60%
Norway
Germany
5.75%
0.00%
Portugal
Greece
17.00%
11.25%
Spain
Guernsey
6.35%
0.60%
Sweden
Iceland
9.05%
3.30%
Switzerland
Ireland
8.15%
2.40%
Turkey
Isle
of
Man
6.35%
0.60%
UK
W.
Europe
Canada
5.75%
US
5.75%
North
America
5.75%
ArgenCna
Belize
Bolivia
Brazil
Chile
Colombia
Costa
Rica
Ecuador
El
Salvador
Guatemala
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Suriname
Uruguay
Venezuela
LaJn
America
0.00%
0.00%
0.00%
17.00%
19.25%
11.15%
8.60%
6.65%
8.60%
9.50%
15.50%
11.15%
9.50%
15.50%
7.55%
15.50%
8.60%
10.25%
7.55%
11.15%
8.60%
17.00%
9.95%
11.25%
13.50%
5.40%
2.85%
0.90%
2.85%
3.75%
9.75%
5.40%
3.75%
9.75%
1.80%
9.75%
2.85%
4.50%
1.80%
5.40%
2.85%
11.25%
4.20%
Angola
Botswana
Burkina
Faso
Cameroon
Cape
Verde
Congo
(DR)
Congo
(Republic)
Cte
d'Ivoire
Egypt
Ethiopia
Gabon
Ghana
Kenya
Morocco
Mozambique
Namibia
Nigeria
Rwanda
Senegal
South
Africa
Tunisia
Uganda
Zambia
Africa
8.60%
6.35%
5.75%
5.75%
7.55%
5.75%
5.75%
9.50%
8.60%
5.75%
5.75%
9.05%
6.35%
6.88%
2.85%
0.60%
0.00%
0.00%
1.80%
0.00%
0.00%
3.75%
2.85%
0.00%
0.00%
3.30%
0.60%
1.13%
10.25%
4.50%
7.03%
1.28%
15.50%
9.75%
14.00%
8.25%
14.00%
8.25%
15.50%
9.75%
11.15%
5.40%
12.50%
6.75%
17.00%
11.25%
12.50%
6.75%
11.15%
5.40%
14.00%
8.25%
12.50%
6.75%
9.50%
3.75%
12.50%
6.75%
9.05%
3.30%
11.15%
5.40%
14.00%
8.25%
12.50%
6.75%
8.60%
2.85%
11.15%
5.40%
12.50%
6.75%
12.50%
6.75%
11.73%
5.98%
Albania
Armenia
Azerbaijan
Belarus
Bosnia
12.50%
10.25%
9.05%
15.50%
15.50%
6.75%
4.50%
3.30%
9.75%
.75%
Montenegro
Poland
Romania
Russia
Serbia
11.15%
7.03%
9.05%
8.60%
12.50%
5.40%
1.28%
3.30%
2.85%
6.75%
Bulgaria
CroaCa
8.60%
9.50%
2.85%
Slovakia
3.75%
Slovenia
7.03%
9.50%
1.28%
3.75%
Czech
Repub
Estonia
Georgia
Hungary
Kazakhstan
Latvia
Lithuania
Macedonia
Moldova
6.80%
6.80%
11.15%
9.50%
8.60%
8.15%
8.15%
11.15%
15.50%
1.05%
Ukraine
20.75%
1.05%
E.
Europe
9.08%
5.40%
Bangladesh
3.75%
Cambodia
2.85%
China
2.40%
Fiji
2.40%
Hong
Kong
5.40%
India
9.75%
Indonesia
Japan
Korea
Macao
Abu
Dhabi
6.50%
0.75%
Malaysia
Bahrain
8.60%
2.85%
MauriCus
Israel
6.80%
1.05%
Mongolia
Jordan
12.50%
6.75%
Pakistan
Kuwait
6.50%
0.75%
Papua
New
Guinea
Lebanon
14.00%
8.25%
Philippines
Oman
6.80%
1.05%
Singapore
Qatar
6.50%
0.75%
Sri
Lanka
Ras
Al
Khaimah
7.03%
1.28%
Taiwan
Saudi
Arabia
6.65%
0.90%
Thailand
Sharjah
7.55%
1.80%
Vietnam
UAE
6.50%
0.75%
Asia
Middle
East
6.85%
1.10%
15.00%
3.33%
11.15%
14.00%
6.65%
12.50%
6.35%
9.05%
9.05%
6.80%
6.65%
6.50%
7.55%
8.15%
14.00%
17.00%
12.50%
8.60%
5.75%
12.50%
6.65%
8.15%
12.50%
7.26%
5.40%
8.25%
0.90%
6.75%
0.60%
3.30%
3.30%
1.05%
0.90%
0.75%
1.80%
2.40%
8.25%
11.25%
6.75%
2.85%
0.00%
6.75%
0.90%
2.40%
6.75%
1.51%
Australia
5.75%
0.00%
Cook
Islands
New
Zealand
12.50%
5.75%
6.75%
0.00%
Australia & NZ
5.75%
0.00%
Aswath Damodaran
32
Proportion of Disneys
Revenues
82.01%
11.64%
6.02%
0.33%
100.00%
ERP
5.50%
6.72%
7.27%
9.44%
5.76%
33
A forward-looking ERP?
100.5 growing @
5.58% a year
112.01
106.10
118.26
124.85
131.81
Beyond year 5
Expected growth rate =
Riskfree rate = 2.17%
Expected CF in year 6 =
131.81(1.0217)
34
4.00%
3.00%
Implied Premium
6.00%
5.00%
2.00%
1.00%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
0.00%
Year
35
Aswath Damodaran
Aswath Damodaran
36
a.
b.
a.
b.
a.
b.
At
this
link,
you
will
nd
the
latest
monthly
ERP
esCmate
that
I
have
for
the
S&P
500.
If
I
hold
all
else
constant
(same
cash
ows,
same
risk
free
rate)
and
lower
the
index
value
by
10%,
what
eect
will
it
have
on
the
ERP?
Increase
Decrease
If
I
hold
all
else
constant
(same
cash
ows,
same
risk
free
rate)
and
lower
the
cash
ow
by
10%,
what
eect
will
it
have
on
the
ERP?
Increase
Decrease
If
I
hold
all
else
constant
(same
cash
ows,
same
risk
free
rate)
increase
the
risk
free
rate
by
1%,
what
eect
will
it
have
on
the
ERP?
Increase
Decrease
Aswath Damodaran
37
20.00%
15.00%
10.00%
5.00%
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0.00%
T. Bond Rate
Aswath Damodaran
38
9.00
8.00
6.00%
7.00
6.00
4.00%
5.00
3.00%
4.00
3.00
Premium (Spread)
5.00%
2.00%
2.00
1.00%
1.00
0.00%
0.00
ERP/Baa Spread
Aswath Damodaran
ERP
39
Figure
17:
Equity
Risk
Premiums,
Cap
Rates
and
Bond
Spreads
8.00%
6.00%
4.00%
2.00%
0.00%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
ERP
Baa
Spread
Cap
Rate
premium
-2.00%
-4.00%
-6.00%
-8.00%
Aswath Damodaran
40
0.00%
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
ArithmeCc
Average
Geometric average
4.00%
Implied
ERP
3.00%
2.00%
1.00%
41
a.
b.
c.
Aswath Damodaran
42
Premium to use
Aswath Damodaran
43
a.
b.
c.
Beta Mythology
a.
b.
c.
a.
b.
c.
d.
e.
46
Sector-average Beta
Average regression beta
across all companies in the
business(es) that the firm
operates in.
Accounting Risk
Quadrant
Accounting Earnings Volatility
How volatile is your company's
earnings, relative to the average
company's earnings?
Accounting Earnings Beta
Regression beta of changes
in earnings at firm versus
changes in earnings for
market index
Proxy measures
Use a proxy for risk
(market cap, sector).
47
Aswath Damodaran
Aswath Damodaran
48
Aswath Damodaran
49
Aswath Damodaran
50
Adjust the business beta for the operating leverage of the firm to arrive at the
unlevered beta for the firm.
Use the financial leverage of the firm to estimate the equity beta for the firm
Levered Beta = Unlevered Beta ( 1 + (1- tax rate) (Debt/Equity))
Aswath Damodaran
51
Bonom-up
Betas
52
Step 1: Find the business or businesses that your firm operates in.
Possible Refinements
Step 2: Find publicly traded firms in each of these businesses and
obtain their regression betas. Compute the simple average across
these regression betas to arrive at an average beta for these publicly
traded firms. Unlever this average beta using the average debt to
equity ratio across the publicly traded firms in the sample.
Unlevered beta for business = Average beta across publicly traded
firms/ (1 + (1- t) (Average D/E ratio across firms))
Step 3: Estimate how much value your firm derives from each of
the different businesses it is in.
Step 5: Compute a levered beta (equity beta) for your firm, using
the market debt to equity ratio for your firm.
Levered bottom-up beta = Unlevered beta (1+ (1-t) (Debt/Equity))
Aswath Damodaran
52
Aswath Damodaran
53
Business
Comparable rms
Unlevered Beta
(1 - Cash/ Firm Value)
Median
Company
Cash/
Business
Sample
Median
Median
Median
Unlevered
Firm
Unlevered
size
Beta
D/E
Tax
rate
Beta
Beta
Value
US
rms
in
broadcasCng
Media
Networks
business
26
1.43
71.09% 40.00%
1.0024
2.80%
1.0313
Global
rms
in
amusement
park
Parks
&
Resorts
business
20
0.87
46.76% 35.67%
0.6677
4.95%
0.7024
Studio
Entertainment
US movie rms
10
1.24
27.06% 40.00%
1.0668
2.96%
1.0993
Consumer
Products
Global
rms
in
toys/games
producCon
&
retail
44
0.74
29.53% 25.00%
0.6034
10.64%
0.6752
InteracCve
Global
computer
gaming
rms
33
1.03
3.26%
1.0085
17.25%
1.2187
Aswath Damodaran
34.55%
54
Business
Revenues
EV/Sales
Media Networks
$20,356
3.27
$66,580
49.27%
$14,087
3.24
$45,683
Studio Entertainment
$5,979
3.05
Consumer Products
$3,555
InteracCve
$1,064
Disney OperaCons
$45,041
Business
Media
Networks
Parks
&
Resorts
Studio
Entertainment
Consumer
Products
InteracCve
Disney
OperaCons
Aswath Damodaran
Value
Propor<on
1.03
$66,579.81
49.27%
33.81%
0.70
$45,682.80
33.81%
$18,234
13.49%
1.10
$18,234.27
13.49%
0.83
$2,952
2.18%
0.68
$2,951.50
2.18%
1.58
$1,684
1.25%
1.22
$1,683.72
1.25%
$135,132
100.00%
0.9239
$135,132.11
D/E
ra<o
10.03%
11.41%
20.71%
117.11%
41.07%
13.10%
Levered
beta
1.0975
0.7537
1.2448
1.1805
1.5385
1.0012
Cost
of
Equity
9.07%
7.09%
9.92%
9.55%
11.61%
8.52%
55
a.
b.
a.
b.
c.
d.
For
many
analysts,
the
risk
free
rate
and
equity
risk
premium
are
just
the
starCng
points
to
get
to
a
cost
of
equity.
The
required
return
that
you
obtain
is
then
augmented
with
premiums
for
other
risks
to
arrive
at
a
built
up
cost
of
equity.
The
jusCcaCons
oered
for
these
premiums
are
varied
but
can
be
broadly
classied
into:
Historical
premium:
The
historical
data
jusCes
adding
a
premium
(for
small
capitalizaCon,
illiquidity)
IntuiCon:
There
are
risks
that
are
being
missed
that
have
to
be
built
in
Reasonableness:
The
discount
rate
that
I
am
geng
looks
too
low.
58
59
60
61
The implied ERP for the S&P 500 was 5.78%. If there is a small cap
premium, where is it?
62
63
EsCmaCon
uncertainty
reects
the
possibility
that
you
could
have
the
wrong
model
or
esCmated
inputs
incorrectly
within
this
model.
Economic
uncertainty
comes
the
fact
that
markets
and
economies
can
change
over
Cme
and
that
even
the
best
models
will
fail
to
capture
these
unexpected
changes.
Micro
uncertainty
refers
to
uncertainty
about
the
potenCal
market
for
a
rms
products,
the
compeCCon
it
will
face
and
the
quality
of
its
management
team.
Macro
uncertainty
reects
the
reality
that
your
rms
fortunes
can
be
aected
by
changes
in
the
macro
economic
environment.
Discrete
risk:
Risks
that
lie
dormant
for
periods
but
show
up
at
points
in
Cme.
(Examples:
A
drug
working
its
way
through
the
FDA
pipeline
may
fail
at
some
stage
of
the
approval
process
or
a
company
in
Venezuela
may
be
naConalized)
ConCnuous
risk:
Risks
changes
in
interest
rates
or
economic
growth
occur
conCnuously
and
aect
value
as
they
happen.
64
Not
all
risk
counts:
While
the
noCon
that
the
cost
of
equity
should
be
higher
for
riskier
investments
and
lower
for
safer
investments
is
intuiCve,
what
risk
should
be
built
into
the
cost
of
equity
is
the
quesCon.
Risk
through
whose
eyes?
While
risk
is
usually
dened
in
terms
of
the
variance
of
actual
returns
around
an
expected
return,
risk
and
return
models
in
nance
assume
that
the
risk
that
should
be
rewarded
(and
thus
built
into
the
discount
rate)
in
valuaCon
should
be
the
risk
perceived
by
the
marginal
investor
in
the
investment
The
diversicaCon
eect:
Most
risk
and
return
models
in
nance
also
assume
that
the
marginal
investor
is
well
diversied,
and
that
the
only
risk
that
he
or
she
perceives
in
an
investment
is
risk
that
cannot
be
diversied
away
(i.e,
market
or
non-diversiable
risk).
In
eect,
it
is
primarily
economic,
macro,
conCnuous
risk
that
should
be
incorporated
into
the
cost
of
equity.
Aswath Damodaran
65
1,865.
Distribution Statistics
10th percentile
5.45%
25th percentile
7.05%
Median
8.33%
75th percentile
9.69%
90th percentile
13.43%
1,800.
1,600.
1,463.
1,400.
1,200.
1,000.
926.
852.
800.
681.
628.
600.
400.
474.
250.
225.
213.
200.
141.
90.
70.
0.
<4%
4-5%
5-6%
6-7%
7-8%
8-9%
9-10%
>15%
66
Is exposed
to all the risk
in the firm
80 units
of firm
specific
risk
Demands a
cost of equity
that reflects this
risk
67
a.
b.
c.
a.
b.
c.
d.
a.
b.
What is debt?
term.
Any
lease
obligaCon,
whether
operaCng
or
capital.
70
Book
value
is
more
reliable
than
market
value
because
it
is
not
as
volaCle:
While
it
is
true
that
book
value
does
not
change
as
much
as
market
value,
this
is
more
a
reecCon
of
weakness
than
strength
Using
book
value
rather
than
market
value
is
a
more
conservaCve
approach
to
esCmaCng
debt
raCos:
For
most
companies,
using
book
values
will
yield
a
lower
cost
of
capital
than
using
market
value
weights.
Since
accounCng
returns
are
computed
based
upon
book
value,
consistency
requires
the
use
of
book
value
in
compuCng
cost
of
capital:
While
it
may
seem
consistent
to
use
book
values
for
both
accounCng
return
and
cost
of
capital
calculaCons,
it
does
not
make
economic
sense.
The
belief
that
you
get
one
shot
at
esCmaCng
the
cost
of
capital
in
a
DCF
valuaCon
and
that
it
cannot
change
over
the
course
of
your
forecasts
is
misplaced.
The
cost
of
capital
can
and
should
change
over
Cme,
as
your
company
changes.
Put
dierently,
if
you
are
forecasCng
that
your
company
will
grow
over
Cme
to
become
a
larger,
more
protable,
lower
growth
company,
your
inputs
should
change
with
your
Debt
raCo
rising
to
that
of
a
mature
company
RelaCve
risk
measure
(Beta)
converging
on
one
Cost
of
debt
reecCve
of
your
protability
&
size
Disneys
cost
of
debt,
based
upon
its
A
raCng
in
November
2013,
wad
3.75%
and
its
marginal
tax
rate
was
36.1%.
!!
Media!Networks!
Parks!&!Resorts!
Studio!
Entertainment!
Consumer!Products!
Interactive!
Disney!Operations!
Cost!of!
Cost!of!
Marginal!tax!
After6tax!cost!of!
Debt!
Cost!of!
equity!
debt!
rate!
debt!
ratio!
capital!
9.07%!
3.75%!
36.10%!
2.40%!
9.12%!
8.46%!
7.09%!
3.75%!
36.10%!
2.40%! 10.24%!
6.61%!
9.92%!
9.55%!
11.65%!
8.52%!
3.75%!
3.75%!
3.75%!
3.75%!
36.10%!
36.10%!
36.10%!
36.10%!
2.40%!
2.40%!
2.40%!
2.40%!
17.16%!
53.94%!
29.11%!
11.58%!
8.63%!
5.69%!
8.96%!
7.81%!
Used risk free rate of 2.75% and Disneys weighted average ERP of 5.75% in
estimating cost of equity
Aswath Damodaran
74
Investment
Analysis
75
Assume
now
that
you
are
the
CFO
of
Disney.
You
are
considering
an
investment
in
a
new
theme
park.
What
cost
of
capital
would
you
use
in
evaluaCng
the
theme
park?
Would
your
answer
be
dierent
if
the
theme
park
were
in
Rio
De
Janeiro
and
your
analysis
were
in
US
dollars?
What
if
the
park
is
in
Rio
but
your
analysis
is
in
$R?
Now
assume
that
you
are
planning
to
divest
yourself
of
ESPN.
What
cost
of
capital
would
you
use
to
value
ESPN?
Aswath Damodaran
75
AcquisiCon ValuaCon
a.
b.
c.
d.
e.
f.
IN
CONCLUSION
Less
rules,
more
rst
principles
78
81