Calculating the Cost of Capital for Disney

Cost of capital: Disney

Recapping the inputs we used to estimate the cost of capital in Disney, we will make the following assumptions :

-      The beta for the first five years will be the bottom-up beta of 1.0012. In conjuction with a risk-free rate of 2.75% and Disney’s ERP of 5.76% this yields a cost of equity of 8.52%

Cost of equity = Risk free rate + Beta* Risk premium = 3.5% + 0.9011 (6%)= 8.91%

-      The cost of debt for Disney for the first five years, based on its ratings of A, is 3.75%. Using Disney’s marginal tax rate of 36.1% gives an after-tax cost of debt of 2.40%:
After tax cost of debt = 3.75%(1-0.361)= 2.4%

The current market debt ratio of 11.5% debt will be used as the debt ratio for the first five years of the valuation. Keep in mind that this debt ratio is computed using the market value of debt (including operating leases) of 15,961 million and a market value of equity of $121,878 million.
Debt ratio = 15,961/ (15,961+ 121,878) = 11.5%

-      Cost of capital = cost of equity (E/(E+D))+ After-tax cost of debt (D/(D+E))= 8.52%(0.885)+ 3.72% (0.115)= 7.81%