Part 1.

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.

Go to finance.yahoo.com. Under the "Markets" and then "US Treasury Bond Rates," you will find the yield to maturity for ten-year Treasury bonds listed as "10 Yr Bond." Collect this number as your risk-free rate.

In the box at the top of the screen, type Walt Disney's ticker symbol (DIS) and press enter. Once you see the basic information for Disney, find and click "Statistics" under the quote. From the key statistics, collect Disney's market capitalization (its market value of equity), enterprise value (market-value equity + net debt), cash, and beta.

To get Disney's cost of debt and the market value of its long-term debt, you will need the price and yield to maturity on the firm's existing long-term bonds. Go to finra-markets.morningstar.com. Under "Market Data," select "Bonds." Under "Search," click "Corporate," and type Disney's ticker symbol. A list of Disney's outstanding bond issues will appear. Assume that Disney's policy is to use the expected return on noncallable ten-year obligations as its cost of debt. Find the noncallable bond issue that is at least 10 years from maturity. (Hint : You will see a column titled "Callable"; make sure the issue you choose has "No" in this column. Bonds may appear on multiple pages.) Find the credit rating and yield to maturity for your chosen bond issue (it is in the column titled "Yield"). Hold the mouse over the table of Disney's bonds and right-click. Select "Export to Microsoft Excel." (Note that this option is available in IE, but may not be in other browsers.) An Excel spreadsheet with all of the data in the table will appear.

You now have the price for each bond issue, but you need to know the size of the issue. Returning to the Web page, click "Walt Disney Company" 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.

The price for each bond issue in your spreadsheet is reported as a percentage of the bond's 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 Disney's debt.

Compute the weights for Disney's equity and debt based on the market value of equity and Disney's market value of debt, computed in Step 5.

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%.

Assuming that Disney has a tax rate of 20%, calculate its after-tax debt cost of capital.

Calculate Disney's WACC.

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?

How confident are you of your estimate? Which implicit assumptions did you make during your data collection efforts?

Suppose a representative consumer has preference over consumption (c) and leisure (1). His indifference curve is described by the following function: u(c, I) = 3 In(c) + 2 In(!). His endowment over time is given by h = 1. His wage rate is 2 in terms of consumption goods. Suppose he has 2 units of dividend income from firm and 1 unit of lump-sum tax from the government. (2) Compute this consumer's optimal choice over consumption, leisure and working time. (15 points) Suppose a representative consumer has preference over consumption (c) and leisure (). His indif- ference curve is described by the following function: u(c, l) = 31n(c) + 21n(1). His endowment over time is given by h = 1. His wage rate is 2 in terms of consumption goods. Suppose he has 2 units of dividend income from firm and 1 unit of lump-sum tax from the govern- ment. (2) Compute this consumer's optimal choice over consumption, leisure and working time. (15 points) (3) Now suppose there is an increase in the lump sum tax. Diagram the effects on consumer's optimal consumption and labor supply. Explain your results. (15 points) Note: under the above utility function, du/al MRSl,c= du/ac (3) Now suppose there is an increase in the lump sum tax. Diagram the effects on consumer's optimal consumption and labor supply. Explain your results. (15 points) Note: under the above utility function, MRSI,c = au/81 au/acConsider a one-period economy with a single representative consumer, a sin- gie representative rm and the government. The representative consmner derives utility from consumption c and leisure l: u(c,l)=h1c+h1l [1) The rm produces output Y using capital K and labor N aecording to Y = zHN1_\" {2) where z is the total factor productivity and a. is the Cobb-Douglas parameter. The rm maximises prots 11' which are then transferred to the representative consumer. The government balances the budget using lump-sum taxes T on the repre- sentative consumer to nance government spending G. The hourly wage in this economy is u: and the consumer has it hours to divide between leisure and labor. 5 ' 6 (i) Write down the consumer's budget constraint and the rm's prots function. (05 marks) (ii) Assume that w = If], s = 20, a = 0.3, and K = 1. Calculate the number of hours that the firm would like to hire and the prots of the representative rm. (05 marks) (iii) Assume that government spending G is 10, the representative eonsumer receives the prots that you calculated above and earns hourly wage to = 10. Calculate how many hours of work the representative con- sumer would like to supply in the market. (10 marks) (iv) In the economy described above, (i) the government budget is balanced, (ii) the representative eonsumer maximizes lifetime utility given the budget constraint and \"EU, and (iii) the rm maximizes prots given the production function and 11:. Is this a competitive equilibrium? Why or why not? (05 marks)