“Capital Structure”
Session 1 The Disney DEMO
Shanghai 2014
MBA CORP FINC 5880
邦保罗
The Finance Framework
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Look at Disney
The Process
Source: Damodaran…
In 1996:
Start with actual performance
Ks% at different debt ratio’s
Beta and Ks% at different debt ratio’s
Estimate cost of debt at each level of debt…
From 10%-90%
Like this…
Beware of tax implications
Debt % and Kd%
So find minimum WACC%
You found best Debt ratio around 40%
Note on ratings…
Cost of rating constraint:
Different rating constraints
Note: All Beta’s are levered..
• All beta’s we calculated are from
companies with LT debt
• They are so called Levered
Beta’s
• Only if a company has NO debt
(Microsoft) the levered
beta=unlevered beta
• So we can calculate all
companies beta’s assuming that
LT debt is zero, 10%, 20% etc….
• You can imagine what happens if
the debt ratio is 90% or more….
Levered and unlevered Beta’s
• How does the Debt ratio of a
company effects the beta and
Ks?
• Through the “financial leverage”
(D/E ratio)
• We can calculate the effect on
Beta from the Debt ratio…
• The higher D/E the higher the
beta for a company
• Let’s take a look at the Hamada
formula:
Hamada and Disney
My Beta ???
• Levered Beta= Unlevered Beta*(1+(1-t%)*D/E)
• Unlevered Beta= Levered Beta/(1+(1-t%)*D/E)
Homework Assignment 1:
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Consider your company’s WACC
Follow the attached searching process
Do this for your company
Put all in an Excel spread sheet
Make the output look exactly like in
attached PPT for your company
• Use FY2013 or any last relevant year…