Market Impact on Company’s Stock

Among the most important internal factors, which shape the current situation is the recent acquisition of well-known American film and television production company Lucasfilm Ltd for 4,05 billion dollars. The long-term influence of this risky deal on the Disney performance in the stock market is hard to predict, but it may be one of the reasons of temporary share price decline in the middle of November.

There are plenty of different factors, which influence the current situation with Disney stock prices. One of the most important external factors is the changing of general condition of the economy. The beta-coefficient of Walt Disney Company (1,17) indicates, that the company’s stocks prices rather highly depend on the general situation in the market. Moreover, the beta of the company, which is more than 1, illustrates the current grow of company stocks, which is more rapid, than the market average. But, at the same time, it also implies, that in case of the market downfall, the company may face drop of the stock prices even more sharp than market average decrease. Thereby, the favorable in the current situation of growing market dependence on the economy’s condition may turn into one of the main challenges for the company in case of the market recession.

There are also a number of competitors, e.g. CBS, News Corp, Time Warner, Via Home whose actions may impact Disney’s Stock price.

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 table¹⁰ 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	6393	6362
Current portion of borrowings	3614	3055
Unearned royalties and other advances	2806	2671
Total current liabilities	12813	12088
Borrowings	10697	10922
Deferred income taxes	2251	2866
Other long-term liabilities	7179	6795
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	31731	30296
Retained earnings	42965	38375
Accumulated other comprehensive loss	-3266	-2630
	71430	66041
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	39759	37385
Noncontrolling interests	2199	2068
Total equity	41958	39453
	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	3614	0,0482	3614
Long-term liabilities	17876	0,238671	17876	12,91%
Common stock	31731	0,423656	136976
Retained earnings	42965
Accumulated other comprehensive loss	-3266
Treasury stock	-31671
Total common equity	39759	0,530842	145004	87,09%
Total	74898		166494

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.

Cost of debt

The first step in estimating the cost of debt is to determine the rate of return debt holders require, r_d.

Disney Company has seven issues of bonds. The main characteristics of the bonds are represented in the table below.

Table 13 Bonds issued by Disney Company

Issue	Price	Coupon (%)	Maturity	First Coupon Date	Yield to maturity (%)	Current yield (%)	Coupon Payment Frequency	Fitch ratings	Callable
Disney Walt CO MTNS BE	103,16	2,750%	16.08.2021	16.02.2011	2,383%	2,666%		A	No
							semi-annual
Disney Walt CO MTNS BE	113,31	3,750%	01.06.2021	01.12.2 011	2,190%	3,309%		A	No
Disney Walt CO MTNS BE	122,89	5,500%	15.03.2019	15.09.2009	2,097%	4,476%		A	No
Disney Walt CO MTNS BE	120,59	5,625%	15.09.2016	15.03.2007	1,189%	4,665%		A	No
Disney Walt CO MTNS BE	101,51	1,350%	16.08.2016	16.02.2012	1,020%	1,330%		A	No
Disney Walt CO MTNS BE	115,51	6,200%	20.06.2014	20.12.2002	0,114%	5,380%		A	No
Disney Walt CO	110,06	4,500%	15.12.2013	15.06.2009	-0,410%	4,089%		A	No

Using information from the part dedicated to the bonds of the company we have that the weighted yield to maturity of all bonds Disney Company issues is 1,83%.

The required return to debt holders, r_d, is not equal to the company’s cost of debt because interest payments are deductible, which means the government in effect pays part of the total cost. As a result, the weighted average cost of capital is calculated using the after-tax cost of debt, r_d(1-T), which is the interest rate on debt, r_d, less the tax savings that results because interest is deductible.¹²

According to the Restated Certificate of incorporation of Walt Disney Company the company is registered in the State of Delaware, USA. The tax rate for corporation income tax return is 8,7%.¹³ United States corporate income tax is 35%.¹⁴ Thus means the tax rate is 43,7%.

Now we can calculate the after tax cost of debt:

r_d(1-T) = 1,83%*(1 – 0,437) = 1,03%.

The cost of debt is quite small because of small yield of maturity of the bonds. It means that we deal with low risky, reliable issuer.

Then we estimate the cost of common equity.