MBA CORP FINC 5880MBA CORP FINC 5880

““Capital Structure”Capital Structure”Session 1 The Disney DEMO Session 1 The Disney DEMO

Shanghai 2014Shanghai 2014

邦保罗邦保罗

The Finance Framework

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 All beta’s we calculated are from companies with LT debtcompanies with LT debt

• They are so called Levered They are so called Levered Beta’sBeta’s

• Only if a company has NO debt Only if a company has NO debt (Microsoft) the levered (Microsoft) the levered beta=unlevered betabeta=unlevered beta

• So we can calculate all So we can calculate all companies beta’s assuming that companies beta’s assuming that LT debt is zero, 10%, 20% etc….LT debt is zero, 10%, 20% etc….

• You can imagine what happens if You can imagine what happens if the debt ratio is 90% or more….the debt ratio is 90% or more….

Levered and unlevered Beta’s

• How does the Debt ratio of a How does the Debt ratio of a company effects the beta and company effects the beta and Ks?Ks?

• Through the “financial leverage” Through the “financial leverage” (D/E ratio)(D/E ratio)

• We can calculate the effect on We can calculate the effect on Beta from the Debt ratio…Beta from the Debt ratio…

• The higher D/E the higher the The higher D/E the higher the beta for a companybeta for a company

• Let’s take a look at the Hamada Let’s take a look at the Hamada formula:formula:

ßetaßeta

Hamada and Disney

• Levered Beta= Unlevered Beta*(1+(1-t%)*D/E)Levered Beta= Unlevered Beta*(1+(1-t%)*D/E)

• Unlevered Beta= Levered Beta/(1+(1-t%)*D/E)Unlevered Beta= Levered Beta/(1+(1-t%)*D/E)

My Beta ???

Homework Assignment 1:

• 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…