For Walt Disney Corp This week, your assignment is to calculate the weights(proportions) of debt and equity for your company. For equity you can use themarket value of stock (number of shares times...

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For Walt Disney Corp

This week, your assignment is to calculate the weights(proportions) of debt and equity for your company. For equity you can use themarket value of stock (number of shares times the current stock price). Fordebt, you can use the book value of long-term debt (from the balance sheet).While market values of debt are "better," they are rather difficultto obtain. Estimate the required rate of return on debt for your company. Thefollowing are three possible approaches: a) You can use the credit ratingprovided by Standard & Poor's or Moody's. Use the ratings to find currentyields above risk-free rates. b) Go toFINRA Market Data. This will give theyield to maturity for EACH bond. You need one measure of the cost of debt, soyou will have to figure out an appropriate way to handle multiple debt issues.c) If your company does not have publicly traded debt (and/or both the previoustwo approaches did not work), you will need to read the footnotes to the annualreport. You may be able to get their estimated borrowing rate. After gatheringthe information:

•Estimate your company's weighted average cost of capital. Youcan use the income statement information to estimate the tax rate.

•If your company uses this in the capital budgeting process(i.e., as the discount rate in NPV and IRR), what assumptions are they making?

•Does your company face any particular difficulties in using thisrate? For example, does your company have different divisions or units thatmight have differing levels of risk?

Write up a 2 page summary of your findings, including anycalculations you might have made, and describe which method you used to findthe required rate of return on debt for your company.

Prepare an additional 2 page report consisting of the capitalstructure choices, as well as an executive summary of your research.

You will examine the mix of debt and equity that your firm uses.After finding this information:

•Compare this to an industry average or a main competitor. Whatare the differences?

•Based on what you know about your selected company, do thesedifferences seem appropriate?

•Relate your company's capital structure choices to theappropriate capital structure theory(ies).

Also, as a component of your executive summary, obtain the currentstock price for your company and use it as an additional calculation. Basedupon all of your research, would you recommend investing in this company?Justify your answer.

Answered Same DayDec 20, 2021

Solution

David answered on Dec 20 2021
3 Votes
Executive Summary:
Companies are financed by the mixtures of different securities which includes bonds, common
stock, prefe
ed stock and other securities which entails different risks and return. With the
variation in the securities held by the company in its capital structure leads to the different rate of
eturn which is evaluated considering different capital structure that is held by the company
which is known as the weighted average cost of capital which is based on the different capital
proportion that is held by the company.
In this paper we will focus on analyzing the cost of capital and the capital structure of Walt
Disney.
The cost of capital is the rate of return that a firm must earn on the projects in which it invests to
maintain the market value of its stock. It can also be thought of as the rate of return required by
the market suppliers of capital to attract their funds to the firm. If risk is held constant, projects
with a rate of return above the cost of capital will increase the value of the firm, and projects
with a rate of return below the cost of capital will decrease the value of the firm. WACC is
calculated on the cost of different long term financing of the company to the proportion of the
espective finance held by the company.
WACC = % of Debt x Cost of debt + % of equity x cost of equity + % of Prefe
ed stock x cost
of prefe
ed stock.
There are several aspects that are taken into consideration while calculating WACC, these...
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