Question

16. Using the Finra[1] website calculate the WACC for Disney (DIS) Corporation.

First, to gather the data, enter the ticker symbol (DIS) in the search box at the top of the page (Get a quote).

VALUE and Cost of Debt

Now click on the Financials tab and go to the Balance Sheet. Record and sum the 2017-09 values for both for the Short-term debt and Long-term debt items. Sum of these two items is equal to Book Value of Debt. We will assume that book value of debt is equal to market value of debt.

Now click on the Bonds tab and click on the bond symbol DIS.GC. Record the YTM of this bond issue. This is your pre-tax cost of debt. Use 21% as the tax rate.

VALUE and Cost of Equity

To find the market value of equity go to the Quote tab and record the value of Mkt Cap. This is your Market Value of Equity.

To calculate the cost of equity, use both the DCF and CAPM methods. Take the average of both methods. That is your cost of equity.

Under the Quote tab: Record the value of Div Yield. That is D₁/P₀ Assume that g is equal to 3Y Ret and hence record that value.

Under the Quote tab: the provided value of Beta. In the FINRA website go to BONDs and record the value of 30Yr Treasury Yield . That is your risk-free rate (rf). Assume the Market Risk Premium is 5%.

Now calculate the WACC and report your results.

[1] https://finra-markets.morningstar.com/MarketData/CompanyInfo/default.jsp

Answer 1

Short term debt from morningstar website = 6172

Long term debt = 19,119

Total book debt = 6172+19119 = 25,291 = Market value of debt (assumed as per problem data)

Yield last traded for DIS.GC = 3.282%

Post tax cost of debt = 3.282% * (1-tax rate) = 3.282%*(1-21%)

market cap = 150.46 billion

Beta = 1.17

Risk free rate = 30 year treasury yield = 3.14%

Cost of equity as per CAPM = Rf + Beta * market risk premium = 3.14% + 1.17 * 5% = 8.99%

Dividend yield = 1.68%

Cost of equity as per DCF = Dividend Yield + Growth = 1.68% + 3-Yr Return

3-Yr return = -1.84%

Since 3-Yr return is negative, it is better to take the average of 3 and 5 year returns

5-Yr return = 11.01%

Hence, average capital growth =(-1.84% + 11.01%)/2 = 4.59%

Cost of equity as per DCF = Dividend Yield + Growth = 1.68% + 4.59% = 6.27%

Average of CAPM and DCF = (8.99% + 6.27%)/2 = 7.63%

WACC = D / V * Kd * (1-T) + E/V * Ke

D = 25291 millions = 25.291 bn

E = 150.46 bn

V = 25.291+150.46 = 175.751

WACC = (25.291 / 175.751) * 3.282%*(1-21%) + 150.46/175.751* 7.63% = 6.905%

Hence, Post Tax WACC = 6.905%