Question

How do we justify this discount rate? Why are these the numbers? Thank you.

					DISNEY CORPORATION PROSPECTIVE FINANCIAL STATEMENT AFTER ACQUISITION
			INCOME STATEMENT											BALANCE SHEET ACQUISITION PROSPECT
									$	millions		current assets						$	million
			revenue						$55,137.00			cash & cash equivalent						$4,017.00
			cost of revenue						$30,306.00			receivable						$7,826.00
			gross profit						$24,831.00			inventories						$1,373.00
			sales, general and administrative						$8,176.00			deferred income tax						$0.00
			restrcuturing, merger & acquisition						$98.00			prepaid expenses						$445.00
			other operating expenses						$2,684.00			other current assets						$2,228.00
				Total operating expenses					$10,958.00				Total current assets					$15,889.00
			operating income						$13,873.00			noncurrent asset
			interest expense						$507.00			gross property, plant & equipment						$57,443.00
			other income(expense)						$422.00			accumulated depreciation						-$29,037.00
			income before tax						$13,788.00			net property, plant & equipment						$28,406.00
			provision for income tax						$4,422.00			equity & other investment						$3,202.00
			net income from contribution						$9,366.00			goodwill						$31,426.00
			others						-$386.00			intangibel assets						$14,476.00
				Net income					$8,980.00			other long term assets						$2,390.00
													Total noncurrent assets					$79,900.00
												current liabilities
	NOTE											short termdebt						$6,172.00
		The financial statement account for possibility of acquisition of Century Fox probably late 2018 or										account payable						$6,490.00
		early 2019										accrued liabilities						$2,365.00
		stakeholder equity shifted from										deferred revenues						$4,568.00
													Total current liabilities					$19,595.00
		quotation review of stock price changes										noncurrent liabilities
		prevailing price $100.35 closing by 1.72% equating to $104.96										long term debt						$19,119.00
												deferred tax liabilities						$4,480.00
		discount count rate estimation at 14.50%										pensions and other benefits						$3,281.00
												minority interest						$3,689.00
		potential change = (0.145 + 1)^1 * 100.35= 114.9										other long term liabilities						$621.00
													Total noncurrent liabilities					$31,190.00
													Total liabilities					$50,785.00
												stockholders equity
												common stock						$36,248.00
												retained earnings						$72,606.00
												treasury stock						-$64,011.00
												accummulated other components						-$3,528.00
													Total stockholders equity					$41,315.00
													Total liabilities and stockholders equity					$92,100.00
				Year	Value	DPSt or Terminal value (TVt)	Calculation	Present value at 14.50%
				0	DPS01	1.56
				1	DPS1	1.77	= 1.56 × (1 + 13.25%)	1.54
				2	DPS2	2	= 1.77 × (1 + 13.13%)	1.52
				3	DPS3	2.26	= 2.00 × (1 + 13.00%)	1.50
				4	DPS4	2.55	= 2.26 × (1 + 12.87%)	1.48
				5	DPS5	2.87	= 2.55 × (1 + 12.75%)	1.46
				5	Terminal value (TV5)	184.89	= 2.87 × (1 + 12.75%) ÷ (14.50% – 12.75%)	93.94
				Intrinsic value of Disney's common stock (per share)				$101.45
				Current share price				$100.35

Answer 1

The discount rate estimation is based upon the cost of capital of the company. This is given to be 14.5%

The year 1 dividend = $1.77 calculated as D0*(1+13.25%) meaning the dividend grows at a rate of 13.25% in the first year. This is discounted back to present value using the formula D1/(1+r)^1

The year 2 dividend = $2 calculated as D1*(1+13.13%) meaning the dividend grows at a rate of 13.13% in the second year. This is discounted back to present value using the formula D2/(1+r)^2

The year 3 dividend = $2.26 calculated as D2*(1+13%) meaning the dividend grows at a rate of 13% in the third year. This is discounted back to present value using the formula D3/(1+r)^3

The year 4 dividend = $2.55 calculated as D3*(1+12.87%) meaning the dividend grows at a rate of 12.87% in the 4th year. This is discounted back to present value using the formula D4/(1+r)^4

The year 5 dividend = $2.87 calculated as D4*(1+12.75%) meaning the dividend grows at a rate of 12.75% in the 5th year. This is discounted back to present value using the formula D5/(1+r)^5

Intrinsic value of the stock is calculated as D6/(k-g)

Since g= 12.75%

Intrinsic value= 2.87*(1+12.75%)/(14.5%-12.75%) = $184.89. This is discounted as Intrinsic value/ (1+r)^5

Sum of all the discounted values of cash flows is the price of the stock.