Question

Dr. Pepper, a manufacturer of beverages, is planning to purchase Canada’s Wonderland theme park. Should Dr. Pepper use its own WACC as the discount rate to evaluate the business of Canada’s Wonderland or should it use Canada’s Wonderland’s WACC? Explain your answer

Answer 1

Since he is planning to purchase Canada’s wonderland theme park, he should use the WACC of the Canada’s wonderland theme park to evaluate its business potential. When doing evaluation for a business it very much important that the discount rate that is used to value that company is appropriate. If the discount rate being used is not appropriate then the output might not be reliable. It will either overestimate the benefits or underestimate the benefit. Dr. Pepper is in beverage industry and the company he is looking to purchase is in theme park or we can say entertainment industry so to value the wonderland’s theme park we should use the discount rate of the wonderland’s theme park company because it business risk might be different, its capital structure might be different. Another way to figure out an appropriate discount rate is to look for a similar company in the same industry and compare with its cost of capital.