Info

8.00%

8.00%

8.00%

8.00%

8.00%

Dividend Payout Ratio

33.86%

33.86%

33.86%

33.86%

33.86%

33.86%

In this scenario, Disney will need to borrow money each year to cover its stock buybacks and the debt ratio increases to 28.30% by the end of year 5.

3. Increase capital expenditures each year: While the first two approaches increase the debt ratio by shrinking the equity, the third approach increases the scale of the firm. It does so by increasing the capital expenditures, which incidentally includes acquisitions of other firms, and financing these expenditures with debt. Disney could increase its debt ratio fairly significantly by increasing capital expenditures. In Table 9.8, we estimate the debt ratio for Disney if it doubles its capital expenditures (relative to the estimates in the earlier tables) and meets its external financing needs with debt.

Table 9.8: Estimated Debt Ratio with 100% higher Capital Expenditures
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