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A step-by-step guide on calculating disney's unlevered beta and cost of equity, as well as its cost of debt. The process involves using the given levered beta and working backwards to find the unlevered beta or starting from the source and esnmate it from the betas of the businesses. The document also covers the calculation of the cost of debt using the current market value of the firm and the debt-to-equity ratio.
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Levered Beta
1 + (1 - t) Debt Equity
"
$
% &
'
=
1 + (1 -.38) 16, 45,
"
$
% & '
= 0.
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Start with the current market value of the firm = 45,193 + $16,682 = $61,875 million D/(D+E) 0.00% 10.00% Debt to capital D/E 0.00% 11.11% D/E = 10/90 =. $ Debt $0 $6,188 10% of $61,
EBITDA $8,422 $8,422 Same as 0% debt DepreciaNon $1,593 $1,593 Same as 0% debt EBIT $6,829 $6,829 Same as 0% debt Interest $0 $294 Pre-‐tax cost of debt * $ Debt
Pre-‐tax Int. cov ∞ 23.24 EBIT/ Interest Expenses Likely RaNng AAA AAA From RaNngs table Pre-‐tax cost of debt 4.75% 4.75% Riskless Rate + Spread
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T.Bond rate in early 2009 = 3.5%
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¨ You need taxable income for interest to provide a tax savings. Note that the EBIT at Disney is $6,829 million. As long as interest expenses are less than $6,829 million, interest expenses remain fully tax-‐deducNble and earn the 38% tax benefit. At an 80% debt raNo, the interest expenses are $6,683 million and the tax benefit is therefore 38% of this amount. ¨ At a 90% debt raNo, however, the interest expenses balloon to $7,518 million, which is greater than the EBIT of $6,829 million. We consider the tax benefit on the interest expenses up to this amount:
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