Info

Debt Ratio

Cost of Equity

tax)

Cost of Capital

0%

9.15%

2.73%

9.15%

10%

9.50%

2.82%

8.84%

20%

9.95%

3.14%

8.59%

30%

10.53%

3.45%

8.40%

40%

11.30%

5.02%

8.78%

50%

12.66%

8.20%

10.43%

60%

15.34%

12.84%

13.84%

16 This will have the effect of reducing interest cost, when debt is increased, and thus interest coverage ratios. This will lead to higher ratings, at least in the short term, and a higher optimal debt ratio.

70%

19.19%

13.39%

15.13%

80%

26.87%

13.78%

16.39%

90%

49.85%

14.06%

17.64%

The optimal debt ratio is shown graphically in Figure 8.3.

Figure 8.3: Disney Cost of Capital at different Debt Ratios

Figure 8.3: Disney Cost of Capital at different Debt Ratios

Debt Ratio

Cost of Equity ♦ After-tax Cost of Debt A Cost of Capital^

Debt Ratio

Cost of Equity ♦ After-tax Cost of Debt A Cost of Capital^

To illustrate the robustness of this solution to alternative measures of levered betas, we re-estimate the costs of debt, equity and capital under the assumption that debt bears some market risk, and the results are summarized in Table 8.9. Table 8.9: Costs of Equity, Debt and Capital with Debt carrying Market Risk- Disney

Debt

Beta of

Cost of

Interest rate

Tax

Cost of Debt

Beta of

Cost of

Ratio

equity

Equity

on debt

Rate

(after-tax)

debt

Capital

0%

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