Question

calculate Disney’s WACC. List the necessary input information to the WACC formula so your calculation is reproducible. Is your calculated WACC value reasonable for Disney? You will have to know how to calculate the WACC formula, the information you need is Disney’s latest annual balance sheet Information on equity, Information on debt, Beta, Risk-free rate and market premium

Corporate tax rate

The above info can be fount on https://www.morningstar.com/

Answer 1

Formula used:

WACC

=

E

/

(E + D)

*

Cost of Equity

+

D

/

(E + D)

*

Cost of Debt

*

(1 - Tax Rate)

Inputs to be used:

1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap",

As of today, Walt Disney Co's market capitalization (E) is $163284.365 Mil.

The market value of debt is typically difficult to calculate, therefore, we use book value of debt (D) to do the calculation. It is simplified by adding the latest two-year average Current Portion of Long-Term Debt and Long-Term Debt & Capital Lease Obligation together.

As of Jun. 2018, Walt Disney Co's latest two-year average Current Portion of Long-Term Debt was $4929.5 Mil and its latest two-year average Long-Term Debt & Capital Lease Obligation was $17801 Mil.

The total Book Value of Debt (D) is $22730.5 Mil.

a) weight of equity = E / (E + D) = 163284.365 / (163284.365 + 22730.5) = 0.8778
b) weight of debt = D / (E + D) = 22730.5 / (163284.365} + 22730.5) = 0.1222

2. Cost of Equity:

We used Capital Asset Pricing Model (CAPM) to calculate the required rate of return.

The formula is:

Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return)

a) We used 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily.

The current risk-free rate is 3.05000000%.

b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. Walt Disney Co's beta is 1.05.

c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. The market premium is 6%.

Cost of Equity = 3.05000000% + (1.05 * 6%) = 9.35%

3. Cost of Debt:
We used last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.

As of Sep. 2017, Walt Disney Co's interest expense (positive number) was $507 Mil.

Its total Book Value of Debt (D) is $22730.5 Mil.

So, Cost of Debt = 507 / 22730.5 = 2.2305%

4. Multiply by one minus Average Tax Rate:

We used the latest two-year average tax rate to do the calculation. The latest Two-year Average Tax Rate is 33.11%

Walt Disney Co's Weighted Average Cost Of Capital (WACC) for today is calculated as:

WACC	=	E / (E + D)	*	Cost of Equity	+	D / (E + D)	*	Cost of Debt	*	(1 - Tax Rate)
	=	0.8778	*	9.35%	+	0.1222	*	2.2305%	*	(1 - 33.11%)
	=	8.39%

So, the Disney’s WACC is 8.39%