Assessing Capital Structure of Disney and Calculating Wacc of Disney (Case Study Sample)
ASSESSING CAPITAL STURUCTURE OF DISNEY AND CALCULATING WACC OF DISNEY.
EXPLAIN HOW EACH ELEMENT OF DEBT AND EQUITY IS FOUND AND EXPLAINING HOW THE FIRM MIXES ITS DEBT AND EQUITY TO MINIMIZE ITS COST OF CAPITAL.
CALCULATIONS, RELEVANT DATA AND SPREADSHEETS ARE TO BE INCLUDED TO SHOW WORKING ON HOW OPTIMAL CAPITAL STRUCTURE CAN BE ATTAINED.
WACC FOR DISNEY
Disney is financed by both debt and equity
WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)’ or WACC=Wd rd(1-T) +We re
Follow the following steps to arrive at WACC of Disney :
Debt portion of total financing -wd =total liabilities $227,791M/321,195M*100%=70.92%
Equity portion of total financing- we =$93,404/$321,195M*100%=29.08
The cost of debt =interest expense/total debt =1546M (in sept 2021) / 115,056M *100% = 1.34%
Tax rate = Income tax /EBIT *100% =25M/2561M*100%=0.98%
Cost of equity for Disney given beta is 1.25 and risk free rate of return =1.48% and market premium i.e. expected market return-risk free rate of return =6%
Cost of equity =1.48%+1.25(6%) =8.98 %
WACC=Wd rd(1-T) +We re
rd is cost of debt and re is cost of equity
WACC of Disney =0.7092*1.34%(1-0.98%) +0.2908*8.98%= 0.94%+ 2.61%=3.55%
The value of WACC IS 3.55% .Return on invested capital is 2.35% in 2021 meaning the expected return is below the WACC value ,indicating Disney is shedding value and is not favorable for investment (Dolbnya ,Vasilyeva et. al ,2020 ) .
Disney is mixing both debt and equity in its capital structure .However the larger part of the company assets are financed by debt and seen by larger weight of debt compared to equity .
The links to financial statements are here : https://financials.morningstar.com/income-statement/is.html?t=DIS®ion
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