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Chapter 12: Estimating the Cost of Capital

Data Case

You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation fora team meeting later today. You quickly realize that the information you need is readily available online.

  1. Go to http://finance.yahoo.com. Under “Market Summary,” you will find the yield to maturity for ten-year Treasury bonds listed as “10 Yr Bond (%).” Collect this number as your risk-free rate.

  2. In the box next to the “Get Quotes” button, type Walt Disney’s ticker symbol (DIS) and press enter. Once you see the basic information for Disney, find and click “Key Statistics” on the left side of the screen. From the key statistics, collect Disney’s market capitalization (its market value of equity), enterprise value (market-value equity + net debt), cash, and beta.

  3. To get Disney’s cost of debt and the market value of its long-term debt, you will need the price and yield to maturity on the firm’s existing long-term bonds. Go to http://cxa.marketwatch.com/finra/BondCenter/Default.aspx. Under “Quick Bond Search,” click “Corporate” and type Disney’s ticker symbol. A list of Disney’s outstanding bond issues will appear. Assume that Disney’s policy is to use the expected return on noncallable ten-year obligations as its cost of debt.Find the noncallable bond issue that is as close to 10 years from maturity as possible. (Hint: You will see a column titled “Callable”; make sure the issue you choose has “No” in this column.)Find the yield to maturity for your chosen bond issue (it is in the column titled “Yield”). Hold the mouse over the table of Disney’s bonds and right-click. Select “Export to Microsoft Excel.” (Note that this option is available in IE, but may not be in other browsers.) An Excel spreadsheet with all of the data in the table will appear.

  4. You now have the price for each bond issue, but you need to know the size of the issue. Returning to the Web page, click “Walt Disney Company” in the first row. This brings up a Web page with all of the information about the bond issue. Scroll down until you find “Amount Outstanding” on the right side. Noting that this amount is quoted in thousands of dollars (e.g., $60,000 means $60 million =$60,000,000), record the issue amount in the appropriate row of your spreadsheet. Repeat this step for all of the bond issues.

  5. The price for each bond issue in your spreadsheet is reported as a percentage of the bond’s par value. For example, 104.50 means that the bond issue is trading at 104.5% of its par value. You can calculate the market value of each bond issue by multiplying the amount outstanding by (Price ÷ 100). Do so for each issue and then calculate the total of all the bond issues. This is the market value of Disney’s debt.

  6. Compute the weights for Disney’s equity and debt based on the market value of equity and Disney’s market value of debt, computed in Step 6.

  7. Calculate Disney’s cost of equity capital using the CAPM, the risk-free rate you collected in Step 1, and a market risk premium of 5%.

  8. Assuming that Disney has a tax rate of 35%, calculate its effective cost of debt capital.

  9. Calculate Disney’s WACC.

  10. Calculate Disney’s net debt by subtracting its cash (collected in Step 2) from its debt. Recalculate the weights for the WACC using the market value of equity, net debt, and enterprise value. Recalculate Disney’s WACC using the weights based on the net debt. How much does it change?

  11. How confident are you of your estimate? Which implicit assumptions did you make during your data collection efforts?





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