Question

Disney is currently trading at $1375 per share. It has 1.81 billion shares outstanding, and has a beta of 1.08. Disney. Disney has $68.31 billion worth bonds outstanding in market values. The last class of bonds that Disney issued had a coupon rate of 6% (coupon payments are paid semi-annual), and have a 1,000 face value. The bonds currently have 27 years left to maturity and are currently trading at 1045.70. Disney does not have any preferred stock outstanding. The expected market risk premium is 7%, and the current Treasury bill rate is 2.15%. Disney has a tax rate of 21%.

1. Given the above information, what is Disney’s WACC?
2. Disney’s last year dividend was $1.76. The dividend has been growing by 5% each year and expected to continue to do so forever. What is Disney’s WACC if you use the average of CAPM and the DCF (dividends) for Disney’s cost of equity.
3. Disney has the following coefficients on the Fama-French 3 factor model: b: 1.04, s:-1.2, h: 1.08

The market risk premium is 4.90%, the size (SMB) risk premium is 3.25%, and the value premium (HML) is 3.80%. What is estimated cost of equity using the 3-factor model? What will Disney’s WACC be if only this estimated cost of equity is used? 5pts

4. Disney is thinking about opening up its own line of fast-food restaurants. To estimate the cost of equity, Disney is using the following Firm’s information to get an estimated cost of equity:

Company Name	Beta	Debt to equity Ratio	Debt Beta
McDonald’s	.68	.26	.10
Jack in the Box	1.68	.58	.30
Yum Brand’s	0.86	.45	.20
Wendy’s	1.11	.30	.25

Estimate the average unlevered equity beta for the group of comparison. Then, re-lever the beta to get an estimate for Disney’s fast food levered beta (using Disney’s current capital structure (D/E), and the associated cost of equity using the CAPM model and the assumptions in problem 2. Assume Debt beta of .20.   What is Disney’s WACC if this estimated cost of equity is used?

Answer 1

Disney per share price = $ 1375

outstanding shares = 1.81 billion shares

Beta(stock) = 1.08

Bond Market value = $ 68.31 billion

coupon rate = 6%

Face value of bond = $ 1000

Price of bond = $1045.7

time to maturity = 27 years

Risk premium = 7%

T.bill rate (risk free rate) = 2.15%

a. Return on equity can be found using CAPM formula :

Re = Rf + Beta(stock)*Risk premium

Re = 2.15% + 1.08*7%

Re = 9.71%

Return on debt (Rd) can be found using the below formula:

YTM = [Coupon payment + (F- P)/n] / (F + P)/2

Rd = (60 + (45.7/27)) / (2045.7/2) = 6.03%

WACC = (E/E+B)*Re + (1-Tc)*(B/E+B)*Rd

WACC = (2488.75/2557.06) * 9.71% + (79%) * (68.31/2557.06) * 6.03%

WACC = 9.57%