Feldman-Hamilton holding has investments in commercial real estate and hotels. The holding recently acquired online reservation agency Govani.com. The holding is hoping that there will be synergies between hotels they own and the reservation system. Feldman-Hamilton holding uses 15% discount rate for all hotel and real estate projects. Before the acquisition Govani used 10% discount rate as a stand-alone company. What discount rate Feldman-Hamilton holding should use to value Govani’s projects? (10 points)
Use 15% since after the merger for all projects the company should use the same discount rate.
Use 10% because that is the appropriate discount rate for Govani’s cash flows, which may have different systematic risk compared to Feldman-Hamilton holding’s real estate and hotel projects.
They need to use the same equally weighted cost of capital for all projects, which cannot be calculated with the information given.
They should use 12.5% percent, which would be fair to both real estate-hotel and reservation system divisions.