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Risk free rate 3.033% (based on Yahoo Finance, 2018)
Market capitalization = $171,920,000,000
Price = $115.49
Beta = 0.81
Enterprise Value = (market equity value + debt) = $196,190,000,000
Cash = $4,150,000,000
Disney Walt Co New Medium Term NTS Book (non-callable bond)
Coupon rate = 7.000%
Yield = 4.12%
Rating = S&P Rating is A+ (Moddy’s rating is A2)
Amount of debt = $1,753,996,900,000 (calculated from excel based on total outstanding bonds issue
Computing the weights
Total value = Equity + debt
Total value = $17,539,969,000 + $1,753,996,900,000
= $189,459,969,000
The weight of debt is given by the total debt divided by the total value of the firm.
Weight for Debt= $ 17,539,969,000 / $189,459,969,000 *100
= 9.26%
Weight of equity is given by total equity value divided by the total value of the firm
Weight for Equity = $171,920,000,000/$189,459,969,000
=90.74%
The cost of equity is given by the sum of the risk free rate and the product of beta and the differential between the expected rate and the risk free rate or market premium rate.
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Cost of equity = Ke = 3.033% + 0.81*(5%-3.033%)
Ke = 4.626%
Cost of debt is given by the product of the yield to maturity rate and the (1-tax rate) multiplier. Therefore, based on the non-callable DIS bond, the yield to maturity or expected rate is 4.12%. The tax rate is 35% indicating the 1-tax rate = 65% or 0.65.
Cost of debt = 4.12%*(1-0.35)
= 2.678%
WACC in this case is given by the sum products of the weights of equity and debt with their respective costs.
WACC = 0.9074 * 4.626% + 0.0925 * 2.678%
WACC = 4.1976% + 0.2477
WACC = 4.445%
Recalculating WACC using net debt
Net debt = Total debt – Cash
Net debt = 17,539,969,000 - $4,150,000,000
Net debt = $13,389,969,000
New weights will be given as follows
Total value = Debt value + equity value
= $13,389,969,000 + $171,920,000,000
= $ 185,309,969,000
Equity weight = $13,389,969,000 / $ 185,309,969,000
= 0.9277
Debt weight = 171,920,000,000 / 185,309,969,000
= 0.07225
New WACC = 0.9277 * 4.626% + 0.07225 * 0.194%
WACC = 4.485%
After using the net debt, the WACC increases slightly by 0.04% which is the differential of the new WACC after adjusting the debt and the previous WACC that considered the total debt. Based on the assumptions made during the data collection I doubt if my WACC is plausible because it appears to be lower than other WACCs for this company such as the gurufocus.com that has relied on the financial information reported in the company’s annual reports.
References
Finra Markets (2018). Disney Walt Co New Medium Term NTS Book. Accessed from http://finra- markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C137918&symbol=DIS.H L
Yahoo Finance. (2018). The Walt Disney Company (DIS). Accessed from https://finance.yahoo.com/quote/DIS/key-statistics?p=DIS
