You work in Walt Disney Companys corporate finance and treasury department and have been assigned to the team estimating Disneys WACC. You must estimate this WACC in preparation for a team meeting later today. You quickly realize that the information you need is readily available online.
1. Go to Under the Market Data you will find the yield to maturity for 10-year Treasury bonds listed as 10 Yr. Bond (%). Collect this number as your risk-free rate.
2. In the box next to the look up button, type Walt Disneys ticker symbol (DIS) and click “Search”. 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 Disneys market capitalization (its market value of equity), enterprise value (market value equity + net debt), cash, and beta.
3. To get Disneys cost of debt and the market value of its long-term debt, you will need the price and yield to maturity on the firms existing long-term bonds. Go to . click “Search, click Corporate type Disneys ticker symbol( DIS ). And click ” show results” A list of Disneys outstanding bond issues will appear. Assume that Disneys policy is to use the yield to maturity on non-callable 10-year obligations as cost of debt. Find the non-callable 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.) you may have to choose bond issued by one of its subsidiaries, like ABC. Find the yield to maturity for your chosen bond issue (it is in the column titled Yield). And enter that yield as pre-tax cost of debt into your spreadsheet. Next, copy and paste the data in the entire table into excel .
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, go to the row of the bond you chose and click the issuer Name 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 bonds 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 Disneys debt.
6. Compute the weights for Disneys equity and debt based on the market value of equity and Disneys market value of debt, computed in Step 5.
7. Calculate Disneys 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 Disneys WACC.
10. Calculate Disneys 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 Disneys 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?
