This lesson explores how several companies and industries are impacted by changing variables in the weighted average cost of capital (WACC) formula. To apply WACC learning to real work complexities, we will examine how Boeing is impacted by interest rates in class and then apply the same lessons to Disney for homework.

Provided Info: Companies within the same sector typically share similar capital structures and costs of capital. For example, most power utilities are engaged in fundamentally the same business; generation, transmitting, and distributing electric power. The utility business is highly dependent upon expensive fixed-asset investments (i.e., power plants) which are often financed with debt. Consequently, analysts expect companies within the same sector or industry to have similar betas, capital structures, bond ratings, and WACCs. Disney is a diversified entertainment company. Its diversification exists because its revenues come from four different, but related, business segments--parks and resorts, studio entertainment, broadcasting and media, and consumer products. Since there is no other enterprise quite like Disney, we examine the WACCs of companies that operate within one or more of its segments. Beta The beta of a stock is a representation of how the stock moves with the broader equity market. Disney has a beta of 0.96 which implies that when the broad equity market goes up or down by one percent, Disney's stock will rise or fall by 0.96 percent. Low beta stocks, between 0.5 and 0.8, tend to be defensive. They do not rise much when the market rises, but they also do not fall significantly when the market falls. Disney's beta indicates a closer relationship to the market than any of its peers used in this case.

The expected return of the market is a fairly general observation. In reality, no one knows by what degree the stock market will rise or fall over the next year. Nevertheless, in order to assess an individual stock we must have a view on where the broader market is heading. The expected return of the market is the same for every stock.

The risk free rate is the U.S. government bond. A U.S. bond's yield is considered risk free because the U.S. has not and is not expected to default. The company's tax rate impacts the after tax cost of debt but has no bearing on either the cost of preferred equity or common equity. The higher a company's tax rate the lower the after tax cost of debt. Consequently, as a source of capital, debt is a tax shield. The pre-tax cost of debt can be determined by calculating the yield to maturity on the company's bonds. A bond's yield to maturity can be influenced by many factors including inflation, credit quality, macroeconomic fundamentals, and how the company's bonds are structured.

1. Use the Terminal Tutorial to calculate Disney's weighted average cost of capital (WACC) for Q1 2019. Bloomberg includes more elements in the WACC calculation than the textbook does. For our purposes, use the textbook formula with the data points from Bloomberg.
2. Use the Bloomberg Terminal to gather the necessary data to make a similar calculation for Q2 2019.
3. Using the Case Study Notes and the accompanying spreadsheet, calculate the WACC of each Disney segment comparable. Describe the primary WACC drivers that explain the differences between the WACC of Disney and its comparables.
4. In the WACC Sensitivity tab on the accompanying spreadsheet, alter the cells as described below to see how changes to WACC's inputs impact the WACC. Explain in a few sentences describing each change.

• FED RATE INCREASE: An increase of the Federal Reserve interest rate by 200 basis points (2.0%) lifts the borrowing costs of every debt issuer. What is Disney's adjusted WACC?
• CREDIT RATING CHANGE: A downgrade in Disney's credit rating should increase its cost of debt to the same level as Six Flags, all other conditions being equal. What is Disney's adjusted WACC?
• DEBT FOR ACQUISITION: In 2018, Disney announced it would acquire Twenty-First Centry Fox assests for $71.3 billion. Assume Disney paid for the acquisition in cash by raising additional debt. What is Disney's adjusted WACC?
• U.S. EQUITY MARKET DOWNTURN: Equity market expectations may cool resulting in an expectation that equity markets may only expand by 200 basis points (2.0%) over the coming year. What is Disney's adjusted WACC?
• INCREASED MARGINAL TAX RATE: The tax rate cut has ended. A new administration is in power. Assume Disney's marginal tax rate rises to 30.0%. What is Disney's adjusted WACC?