You are trying to estimate out how much it costs Disney to raise capital. The outstanding bonds have a 4.16% yield to

Question

You are trying to estimate out how much it costs Disney to raise capital. The outstanding bonds have a 4.16% yield to maturity. The appropriate tax rate is 12%. The common stock has a current dividend (D0) of 1.76. Dividends are expected to growth by 6.5% per year and the stock is priced at $141.89. If they use 17% debt financing and 83% common stock financing, what is the weighted average cost of capital?

Help In Homework · Accepted Answer

Weighted average cost of capital (WACC) = [(S/S+B)*Rs + (B/S+B)*Rb(1-tc)] S = equity, B = debt, Rs = Cost of equity, Rb = cost of debt, tc = corporations tax rate The yield to maturity on the bonds is the cost of debt. Rb 0.0416 tc 0.12 For the common stock, D0 1.76 g 0.065 D1 1.76*(1+.065) D1 1.8744 According to the dividend growth model. P0 = D1/(Rs-g) P0 141.89 Rs is the cost of equity 141.89 1.8744/(R - .065) (Rs - .065) 1.8744/141.89 (Rs - .065) 0.01321 Rs .01321 + .065 Rs 0.07821 Equity financing is 83% S/(S+B) 0.83 Debt financing is 17% B/(S+B) 0.17 WACC .83*.07821 + .17*.0416*(1-.12) WACC .064914 + .007072*(.88) WACC 0.07114 The weighted average cost of capital (WACC) is 7.11%.

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You are trying to estimate out how much it costs Disney to raise capital

Expert Solution

Archived Solution

Weighted average cost of capital (WACC) = [(S/S+B)Rs + (B/S+B)Rb(1-tc)]
	S = equity, B = debt, Rs = Cost of equity, Rb = cost of debt,
	tc = corporations tax rate

The yield to maturity on the bonds is the cost of debt.
Rb	0.0416
tc	0.12

For the common stock,
D0	1.76
g	0.065
D1	1.76*(1+.065)
D1	1.8744

According to the dividend growth model.
P0 = D1/(Rs-g)
P0	141.89
Rs is the cost of equity
141.89	1.8744/(R - .065)
(Rs - .065)	1.8744/141.89
(Rs - .065)	0.01321
Rs	.01321 + .065
Rs	0.07821

Equity financing is 83%
S/(S+B)	0.83
Debt financing is 17%
B/(S+B)	0.17

WACC	.83.07821 + .17.0416*(1-.12)
WACC	.064914 + .007072*(.88)
WACC	0.07114

The weighted average cost of capital (WACC) is 7.11%.