How may Disney's WACC be impacted by stated changes in its operating environment. Consider the following scenar- ios: 1. an increase in the Federal Reserve reference rate; 2. a two notch downgrade in Disney's credit rating; 3. adding debt to Disney's capital structure for an acquisition; 4. a downturn in the US equity market; and, 5. an increase in Disney's marginal income tax rate?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
icon
Concept explainers
Question
Weighted Average Cost of Capital
Scenario Changes
Cost of Capital Components
Capital Structure Components
Expected
Return of
WACC
Risk Free
Pre-Tax
Debt Cost
Beta
Bond
Short-Term Long-Term
Tax Rate
Total
Rate
Equity
Market
Rating
Debt
Debt
Capital
Target
Disney
Six Flags
0.95
10.4%
3.1%
12.0%
3.3%
A
157,215
5,992
17,681
180,888
9.0%
0.91
10.4%
3.1%
21.3%
5.9%
BB
5,892
2,063
7,955
8.1%
Fed Rate Move
Disney
Six Flags
0.95
10.4%
3.1%
12.0%
3.3%
A
157,215
5,992
17,681
180,888
9.0%
0.91
10.4%
3.1%
21.3%
5.9%
BB
5,892
2163
7,955
8.1%
Credit Rating Change
Disney
Six Flags
0.95
10.4%
3.1%
12.0%
3.3%
A
157,215
5,992
17,681
180,888
9.0%
0.91
10.4%
3.1%
21.3%
5.9%
BB
5,892
2,063
7,955
8.1%
Additional Debt for Fox Acquisition
Disney
Six Flags
0.95
10.4%
3.1%
12.0%
3.3%
A
157,215
5,992
17,681
180,888
9.0%
0.91
10.4%
3.1%
21.3%
5.9%
BB
5,892
2,063
7,955
8.1%
Bear Stock Market
A
157,215
5,992
17,681
180,888
9.0%
Disney
Six Flags
0.95
10.4%
3.1%
12.0%
3.3%
0.91
10.4%
3.1%
21.3%
5.9%
BB
5,892
2,063
7,955
8.1%
Tax Rate Increases
Disney
0.95
10.4%
3.1%
12.0%
3.3%
A
157,215
5,992
17,681
180,888
9.0%
Six Flags
10.4%
21.3%
5.9%
BB
5,892
2,063
7,955
8.1%
0.91
3.1%
Transcribed Image Text:Weighted Average Cost of Capital Scenario Changes Cost of Capital Components Capital Structure Components Expected Return of WACC Risk Free Pre-Tax Debt Cost Beta Bond Short-Term Long-Term Tax Rate Total Rate Equity Market Rating Debt Debt Capital Target Disney Six Flags 0.95 10.4% 3.1% 12.0% 3.3% A 157,215 5,992 17,681 180,888 9.0% 0.91 10.4% 3.1% 21.3% 5.9% BB 5,892 2,063 7,955 8.1% Fed Rate Move Disney Six Flags 0.95 10.4% 3.1% 12.0% 3.3% A 157,215 5,992 17,681 180,888 9.0% 0.91 10.4% 3.1% 21.3% 5.9% BB 5,892 2163 7,955 8.1% Credit Rating Change Disney Six Flags 0.95 10.4% 3.1% 12.0% 3.3% A 157,215 5,992 17,681 180,888 9.0% 0.91 10.4% 3.1% 21.3% 5.9% BB 5,892 2,063 7,955 8.1% Additional Debt for Fox Acquisition Disney Six Flags 0.95 10.4% 3.1% 12.0% 3.3% A 157,215 5,992 17,681 180,888 9.0% 0.91 10.4% 3.1% 21.3% 5.9% BB 5,892 2,063 7,955 8.1% Bear Stock Market A 157,215 5,992 17,681 180,888 9.0% Disney Six Flags 0.95 10.4% 3.1% 12.0% 3.3% 0.91 10.4% 3.1% 21.3% 5.9% BB 5,892 2,063 7,955 8.1% Tax Rate Increases Disney 0.95 10.4% 3.1% 12.0% 3.3% A 157,215 5,992 17,681 180,888 9.0% Six Flags 10.4% 21.3% 5.9% BB 5,892 2,063 7,955 8.1% 0.91 3.1%
3. How may Disney's WACC be impacted by stated changes
in its operating environment. Consider the following scenar-
ios:
1. an increase in the Federal Reserve reference rate;
2. a two notch downgrade in Disney's credit rating;
3. adding debt to Disney's capital structure for an acquisition;
4. a downturn in the US equity market; and,
5. an increase in Disney's marginal income tax rate?
Transcribed Image Text:3. How may Disney's WACC be impacted by stated changes in its operating environment. Consider the following scenar- ios: 1. an increase in the Federal Reserve reference rate; 2. a two notch downgrade in Disney's credit rating; 3. adding debt to Disney's capital structure for an acquisition; 4. a downturn in the US equity market; and, 5. an increase in Disney's marginal income tax rate?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 6 steps

Blurred answer
Knowledge Booster
Exchange Rate Risk
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education