You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s 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 finance.yahoo.com. Search for the yield to maturity for 10-year Treasury bond susing the ticker ^TNX. Collect this number as the long-term risk-free rate.
2. Using Walt Disney’s ticker symbol (DIS), find the key statistics page and collect Disney’s market capitalization (its market value of equity), enterprise value (market-value equity + net debt), cash, and beta.
3. Next, estimate Disney’s cost of debt. Assume that Disney’s policy is to use the expected return on noncallable 10-year obligations as its cost of debt. Using data from FINRA markets bond center, search for one of Disney’s noncallable bond issues that is at least 10 years from maturity.
Use the yield to maturity for your chosen bond issue as the cost of debt.
4. You now need to know the market value of Disney’s outstanding debt. Because obtaining market values of debt is difficult, practitioners often just use the book value of debt as an approximation for the market value. We will follow that precedent here. Obtain the total book value of short- and long-term debt from Disney’s latest balance sheet.
5. Compute the weights for Disney’s equity and debt based on the market value of equity and Disney’s book value of debt, computed in Step 4.
6. Calculate Disney’s cost of equity capital using the CAPM, the risk-free rate you collected in Step 1, and a market risk premium of 5%.
7. Assuming that Disney has a tax rate of 20%, calculate its after-tax debt cost of capital.
8. Calculate Disney’s WACC.
9. Calculate Disney’s 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 Disney’s WACC using the weights based on the net debt. How much does it change?
10. Because you are worried about using the book value of debt rather than the market value, you decide to do a sensitivity analysis. Re-estimate Disney’s WACC by assuming that the market value of debt is 20% higher and lower than the book value.
11. How confident are you of your estimate? What implicit assumptions did you make during your data collection efforts?