Chapter 4. Estimating cost of capital.

Disney Company employs different types of capital, such as common equity and debt. The Company does not issue preferred stock therefore we have just two components of capital cost. Each component cost is represented by the rate of return on each security.

First of all we estimate the weight of debt and common equity in total sum of liabilities. The table[10] below shows part of company’s balance sheet for October 1, 2011 - September 29, 2012.

Table 11 Liabilities of Walt Disney Company

LIABILITIES AND EQUITES	September, 2012	October, 2011
Current liabilities
Accounts payable and other accrued liabilities
Current portion of borrowings
Unearned royalties and other advances
Total current liabilities
Borrowings
Deferred income taxes
Other long-term liabilities

Commitments and contingencies
Disney Shareholders’ equity
Preferred stock, $.01 par value Authorized – 100 million shares, Issued – none	-	-

Common stock, $.01 par value
Authorized – 4.6 billion shares, Issued – 2.8 billion shares at
September 29, 2012 and 2.7 billion shares at October 1, 2011
Retained earnings
Accumulated other comprehensive loss	-3266	-2630

Treasury stock, at cost, 1.0 billion shares at September 29, 2012 and 937.8 million shares at October 1, 2011	-31671	-28656
Total Disney Shareholders’ equity
Noncontrolling interests
Total equity
	74898	72124

Now we evaluate the target capital structure. For that:

1. Estimate percentage of long-term liabilities in total liabilities. To estimate the cost of capital we do not take into account current liabilities, because we assume that they have seasonal fluctuations during the year, often dropping to zero.

2. Estimate percentage of total common equity which includes common stock, retained earnings and excludes treasury stock.

3. Adopt the book value of common equity to the market value and estimate new sum of total liabilities in respect to the market value.

4. Estimate percentage of common equity.

There is no available information regarding market value of debt of the company. Therefore we assume that some of the long-term bonds sell at a discount and some sell at a premium, but their aggregate market value is approximately equal to their aggregate book value.[11]

The results of these steps are represented in table below (mlns. of dollars, September 29, 2012)

Table 12 Book values, market values and target capital structure

Investor-supplied capital	Book value	Percent of total	Market value	Target capital structure
Current liabilities		0,0482
Long-term liabilities		0,238671		12,91%
Common stock		0,423656
Retained earnings
Accumulated other comprehensive loss	-3266
Treasury stock	-31671
Total common equity		0,530842		87,09%
Total

Thus in its target capital structure Disney Company includes 12,91% debt and 87,09% common equity. We will use those target weights when calculating Disney’s weighted average cost of capital.

The next step is calculating the cost of debt.

Date: 2015-01-29; view: 1015

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