Prof. You are doing a great job sharing these valuable lessons for free god bless you, If you don't mind, can you buy a podcast level mic, good one should start at $70 this will be the cherry on top because sometimes your voice gets fuzzy and I'm missing important details.
Hello Prof. I have a question about the hurdle rate. You said one should use the cost of capital to the firm as a hurdle rate to discount the cashflows to the firm from the project. Shouldn't one rather calculate a discount rate which takes into account the riskiness of the project, not the business you are already in? Suppose you are a risky firm with a high hurdle rate and have the opportunity to invest in a low risk project with favourable returns. Using the companys high hurdle rate would lead you to not invest in the project, while it would be a good investment. The only reason I can come up with is that the hurdle rate represents your cost of accessing the capital. But taking the project should bring your overall risk -> hurlde rate -> cost down. Also shouldn't you use expected means of financing the project as weights when calculating the cost of capital. The financing mix of the project may differ from the mix of the firm. Thank you for these great lectures
He used the cost of capital for the theme parks business as his discount rate and not the cost of capital of the company as a whole. This discount rate reflects the riskiness inherent in the theme parks business. With regards to other risks, as prof has already mentioned, location specific risks such as political risks get diversified away for a business like Disney's. He did however adjust the theme park business's cost of capital to accommodate the fact that it is being set up in an emerging economy. With regards to the financing mix, there is only debt or equity (with convertible being qualifying as debt and equity). You can however include another term for preference share financing in the cost of capital equation but we usually don't consider that so as not to complicate things.
