WACC Project

Introduction

The Walt Disney Company is the world’s largest media and entertainment conglomerate

with assets encompassing media networks, studio entertainment, parks and resorts, and

consumer products. The Walt Disney Company’s television and media network assets include

the ABC television network, and ten broadcast stations. In addition, Walt Disney’s portfolio of

cable networks include: ABC Family, Disney Channel, Toon Disney, and ESPN (80% ownership).

The Walt Disney Studios produces films through lines such as Walt Disney Pictures, Touchstone,

and Pixar. With the recent acquisition of Marvel Entertainment, the Walt Disney Company

enters as a top comic book publisher and film producer. Studio entertainment produces and

acquires live-action and animated motion pictures for distribution to the theatrical, home video

and television markets. Theme parks and resorts include the operations of the Walt Disney

World Resort in Florida, Disneyland Park, the Disneyland Hotel and the Disneyland Pacific Hotel

in California. Consumer products segment includes merchandise licensing, publishing.

The Walt Disney Company has a prestigious history in the entertainment industry,

stretching over 75 years. Since its inception in 1923, the Walt Disney Company and additional

affiliated businesses have remained committed to produce supreme entertainment experiences

based upon the rich legacy of quality creative content and incomparable storytelling. Within

the past few decades, Disney has moved into a wider market, beginning the Disney Channel on

cable and establishing subdivisions such as Touchstone Pictures to produce films other than the

usual family-oriented fare, gaining a firmer footing on a broader range. Starting in 1984, Disney

enjoyed an enormous creative and financial renaissance, in part to the leadership of CEO

Michael Eisner, the success of all its subsidiaries, sales through the Disney Stores, and a

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recommitment to excellence in developing original feature-length animated films. Under

Eisner’s guidance, Disney acquired Capital Cities/ABC in 1996, a $19 billion deal that increased

the company’s stature immensely (Sander, 1). Adding to the theme parks, cruise ships,

professional sports teams, and dozens of other businesses owned by the company, the

acquisition of Capital Cities/ABC gave Disney the power of broadcasting and the ability to meld

entertainment content with programming. During the late 1990s, the company was

aggressively building a presence on the Internet and adopting a concentrated approach to

international expansion. Disney has traditionally relied on its existing creative components to

continually produce new original properties to fuel the consumer products sales however in

2009 the media giant purchased Marvel for $4.3 billion in cash and stock. The deal expanded

Disney’s stable of intellectual property with the addition of such characters as Iron Man, Spider

Man, and the X-Men. Which have all been turned into successful Hollywood blockbusters and

Licensed for other purposes (Hoovers, 1).

Equations with data and description

Cost of Equity

Beta from Regression and two Betas from analysts

Regression-1.21

Google Finance-1.20

Yahoo Finance-1.33

Beta Chosen for CAPM and why

Since the betas from all three sources, Google Finance (1.20), Yahoo Finance (1.33) and the beta from regression totals (1.21) are close, I decided to use the average between the three. The average between the totals is 1.25

-See Appendix A

Capital Assets Pricing Model (include how determined RF and [ RM or (RM – RF)]

Risk Free Rate (RF), I chose the 30 Year Treasury Yield from the Wall Street Journal as of 20 March 2017. The Market Risk Premium was obtained from stock analysis on net. The expected rate of market portfolio return for Disney was 13.12%. Through subtracting the risk free rate from the market expected return, (Rm-Rf). I concluded that my market risk premium was: 13.12% - 3.10% = 10.02%. I decided to use the data from stock analysis on net versus the DCF, because the DCF was used on a quarterly basis and I wasn’t sure if the timing will affect my final analysis which was conducted on an annual basis.

CAPM

Discounted Cash Flow (DCF)

[(Dividend1 x (1+g)]/ Price0 + g

[$1.42x (1 + 6.46)]/$100.80 + 6.46

$10.59/$107.26= 9.87%

Own-Bond-Yield-plus-Judgmental-Risk-Premium (include how determine risk premium)

· Read historical risk premium Chapter 9 cost of capital, formula is re= rd + judgmental risk premium (rd = cost of debt, re = cost of equity) Brandon chose 6.2 because if the riskiness explain that Disney is the leader in the industry for the longest and that they have established dominance in a global presence which lowers their risk, therefore I chose to lower the risk premium by 1%

According to the textbook, the historical risk premium uses data from 1926 thorugh the most recent year

Cost of Preferred Stock

Disney has not issued any preferred stock.

Cost of Debt (make sure to include table that lists all bond issues with weighted average cost of debt)

Disney cost of debt was determined by the sum of all the market values of bonds issued. The formula used to determine each individual market value was the amount issued divided by the par value. This gave me the quantity of bond issued which I multiplied by the price of the bond.

My calculations rendered these totals:

99,900,000 + 99,900,000 + 90,100,000 + 98,900,000 + 103,100,000 + 75,225,000 + 76,275,000 + 75,525,000 + 76,350,000 + 75,225,000 = 870,500,000

Market Value of Debt (will have calculated above, but will need to add any long term leases from balance sheet to get total market value of debt)

Market Value of debt is determined by adding the cost of debt to the cost of leases.

Mv of bonds + Mv of Capital leases = Mv of Debt

870,500,000 + 5,132,000,000 = 6,002,500,000

Market Value of Equity

The Market value of equity is calculated by multiplying the number of common shares by the price of the stock.

1,580,000,000 ($113.11) = $178,713,800,000.00

Market Value of Preferred Stock

The Disney company has not issued preferred stock.

Value of Firm

The value of the Disney Company was determined by using the following formula:

Market Value of dividends + Market Value of equity = Market Value of the firm

6,002,500,000 + $178,713,800,000 = $184,716,300,000

Firm’s Tax Rate (explain how determined)

Disney’s company tax rate is 34.15, according to data from Morningstar.com for the year of 2016.

Weight for Equity

The Disney Company Weight of Equity was calculated by using the formula below:

Market Value of Equity / Market Value of Firm

$178,713,800,000 / $184,716,300,000 = 97%

Weight for Preferred Stock

The Disney Company has a 0% weight of preferred stock, since it hasn’t issued preferred stock.

Weight for Debt

To calculate the Weight of Debt we use the formula:

Market Value of Debt / Market Value of Firm

$6,002,500,000/ $184,716,300,000 = 3%

WACC (Weighted Average Cost of Capital)

*no preferred stock, all is debt and equity

*wacc=(wd X (1-Tax rate) X Rd) + (ws X average rs)

(Wd X (1-34.15) X Rd) + (Ws X average Rs)

I. Assumptions: including but not limited to RF , RM, Rm - RF. growth rate of dividends. This page should have a brief description of how you came up with the estimates with spreadsheets, etc. to be put in the appendix.

1) The risk markup that I chose for my company was the arithmetic average of t-bonds of 6.24% dated 1928-2016. The reasoning for my selection was based on the fact that the Disney Company was founded in 1923.

II. Appendix

Appendix should include all relevant data including debt data from Morningstar, calculations of weighted average cost of debt, stock returns, betas from analysts, beta regression analysis, method/sourcing for RF and RM, growth rates for dividends, different methods to determine tax rates, etc.

1) Screenshot form regression

III. References

1) http://www.investopedia.com/terms/b/beta.asp