[MUSIC] A couple of things to round up and we're going to sort of close the, the session for today. Well, the, the question that we're going to pose here, is whether we should use one discount rate or more the discount rate? And let's go back to Starbucks for just a minute. In the previous session, we calculated the cost of capital of Starbuck's back in September 2013 at about 7.2%. But now, think about the following, there are many companies that actually have operations in many countries, and it is not unusual at all for headquarters, wherever the company actually has the main base. Til the country managers in different countries say, well, you know, we expect you to deliver this return or that return, or that return, or that return. And when you actually look across different countries, those returns are pretty different. We've been dealing here at IESE with companies that actually have. Investments in many different countries, and when you ask the country managers, you know, what is the rate of return that is required from you? And you ask different country managers, in different countries for the same company, the numbers that they give you are actually vastly different. Because headquarters think that, you know maybe investing in Norway and investing in Sweden, are not all that different and they may require the same return. But investing in Norway or investing in Nigeria, or investing in Norway and investing in Mexico, or investing in Norway and investing in Indonesia, all those things would be different. And therefore they would be asking, different discount rate. All right? Now the same thing might happen, with companies that have different divisions. I mentioned, if you remember when we were discussing the cost of capital, I mentioned Boeing. Boeing is a company that has a commercial airline division. That is the one that most people know. They manufacture and sell planes. But they also have a defense division. They have a lot of contracts with the With the U.S. government the defense division tends to be far more stable then the commercial airline division, and there you can ask the question. Should I discount the projects of the commercial airline division and the defense division at the same rate? Well, that's a very tricky question because the commercial airline division is actually quite a bit riskier than the defense division and so, here, what we're basically opening, that the, the, the, the spectrum of not being locked to just one discount rate. We're, we're posing the question whether there are instances in which you may want to consider more than one discount rate. Maybe because you operate in very different countries, or maybe because you have very different divisions in the company that, that you actually operate. Now this is a very tricky question we could spend actually not only one session, but more than one session on this project. So let me just give you a, a couple of points about this. Strictly speaking we would like to discount each project at a discount rate that reflects the risk of that particular project. All right so so that's the basic idea, theory would tell you that if a project's cash flows are riskier then you should discount them at a higher discount rate, so strictly speaking if if everything were very easy to do in life. Then each product should have it's own discount rate. What is the problem with that? Well that if we were to do that then we would open the question of, so how do you calculate the discount rate for each of these projects? And that question doesn't have, a very easy answer. That's why the, the real question that you need to ask is. If we're investing or having operations in different countries, are these countries substantially different? Now let me say, substantially different because there's now theoretical definition of that. You know, this is a judgement call that some in the company needs to make. Is it investing in Norway substantially different as investing in Sweden or is investing in Norway. The more you believe that these two countries operations are substantially different, then the more you actually need to use different discount rates for one and the other. Same thing when you have divisions within a company. The question you need to pose is, are these two divisions substantially different from each other? And again, there is no theoretical definition of substantial. This is again another judgement call. Basically, when you, you know, when you go into Boeing. Then you know, what of what we know about Boeing would actually push you to say, yes, these divisions are actually quite a bit different, and yes, I may want to have a different discount rate. But this is a question that each company, each CFO actually needs to post, whether countries' operations are very different or divisions are very different. If the answer to that is no, then that's it we're done. We calculate the cost of capital as we've done it before, and you use that cost of capital to discount. The potential investments in all the countries in which you're having operations, and in all the divisions in which you're having operations. So if the company is more or less homogenous, and they operate in more or less similar countries, than one discount rate, the company's cost of capital would actually do. Now, if you're the type of company that you have operations in many different countries, and you have many different divisions, then you may want to consider count discount rates for different countries. Different discount rates for different countries. And different discount rates for different divisions, and how we get to calculate that? Well, we're not going to get into that, but what is important is that the more specific that we want to be, the more assumptions we need to be making and the more fishy. It's going to be the estimate of our discount rate. So, it's not difficult as you've seen, to calculate the cost of capital of a company. It's more difficult to calculate it for a given division, and it's even more difficult to calculate it for a given subdivision, if a company has that. So the more specific you want to be, the more assumptions you need to be piling up, and therefore the more fishy the whole calculation is going to get. So, bottom line on this each company makes a judgment call on this. Each company needs to decide whether the countries in which they operate are substantially different so that they deserve different discount rates. Or that the divisions that the company has are substantially different, so that they actually deserve different discount. [MUSIC]
