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The cost of capital

The eventual formula for weighted average cost of capital (WACC) will be:

WACC = wdrd(1-T) + wsrs,

where wd – target weight of debt,

ws – target weight of common equity,

rd – interest rate on the firm’s new debt,

rs – component cost of common equity.

As it was mentioned above the preferable approach to estimate the cost of common equity is CAPM model, we take the rate 8,12%.

Now we estimate the weighted average cost of capital:

WACC = 12,91%*1,03%+87,09%*8,12% = 7,31%.

7,34% is the cost the company would incur to raise marginal dollar of capital.

The WACC is the rate of return that the firm must expect to earn on its average-risk investments. Our weighted cost of capital is relatively low which means low risk. Low risk in its turn leads to high enterprise value.

Also we could use another method. We could estimate three WACC using all the three approaches regarding to the cost of common equity. Afterwards, we could find the average of three WACC. In this case the average weighted average cost of capital would be 8,9%.

The WACC is the rate of return that the firm must expect to earn on its average-risk investments. Our weighted cost of capital (7,31%) is relatively low which means low risk. Low risk in its turn leads to high enterprise value.

 


 

References[2] :

1.General characteristics of the company:

· Competitors http://financials.morningstar.com

· Finance http://www.finance.yahoo.com

· MarketLine database. Available at: http://www.marketlineinfo.com/

· The Wall Disney company. Available at: http://thewaltdisneycompany.com

· The Walt Disney Company annual report 2011. Available at: http://thewaltdisneycompany.com

2. Bonds valuation:

· Bonds. Available at: http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/Default.aspx

· CNN Money. Available at: http://cnnfn.cnn.com/2001/07/23/deals/fox_disney/

· Disney Walt Co Mtns Be 2.75% | Maturity:2021. http://quicktake.morningstar.com/StockNet/Bondsquote.aspx?bid=bc3786e01cbadd283004f3f452d560fa&bname=Disney+Walt+Co+Mtns+Be+2.75%25+|+Maturity%3a2021&ticker=DIS&country=USA&clientid=dotcom

· The Walt Disney Company. Fact Book 2011. Available at: http://cs6271.userapi.com/u358451/docs/43032052530a/2011-fact-book.pdf

· Yahoo finance/ Bond Screener. http://reports.finance.yahoo.com/z1?b=1&is=Disney&sf=i&so=d

· http://www.morningstar.com/Cover/Bonds.aspx

 

3. Stocks valuation:

· Google finance. Available at: http://www.google.com/finance

· Yahoo finance . Available at: http://reports.finance.yahoo.com/z1?b=1&is=Disney&sf=i&so=d

· Brigham, M. Ehrhardt. Financial Management: Theory & Practice. 13th ed. Thomson-South Western. 2010.

4.Estimating cost of Capital:

 
· Delaware State information. Available at: http://corp.delaware.gov/frtax.shtml · E. Brigham, M. Ehrhardt. Financial Management: Theory & Practice. 13th ed. Thomson-South Western. 2010. · Financial report. Disney Company. Available at: http://thewaltdisneycompany.com/sites/default/files/r US Tax rates. Available at: http://www.taxrates.cc/html/us-tax-rates.html · Yahoo finance . Available at: http://finance.yahoo.com/    
         
         
         
         


Date: 2015-01-29; view: 939


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