【正文】 38% of this amount. ? At a 90% debt ratio, however, the interest expenses balloon to $7,518 million, which is greater than the EBIT of $6,829 million. We consider the tax benefit on the interest expenses up to this amount: Maximum Tax Benefit = EBIT * Marginal Tax Rate = $6,829 million * = $2,595 million Adjusted Marginal Tax Rate = Maximum Tax Benefit/Interest Expenses = $2,595/$7,518 = % Aswath Damodaran 20 Disney’s cost of capital schedule… Aswath Damodaran 21 Disney: Cost of Capital Chart Aswath Damodaran 22 Disney: Cost of Capital Chart: 1997 10 .50 %11 .00 %11 .50 %12 .00 %12 .50 %13 .00 %13 .50 %14 .00 %0%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%D eb t R at i oCost of CapitalC os t o f C ap it a lAswath Damodaran 23 The cost of capital approach suggests that Disney should do the following… ? Disney currently has $ billion in debt. The optimal dollar debt (at 40%) is roughly $ billion. Disney has excess debt capacity of $ billion. ? To move to its optimal and gain the increase in value, Disney should borrow $ 8 billion and buy back stock. ? Given the magnitude of this decision, you should expect to answer three questions: ? Why should we do it? ? What if something goes wrong? ? What if we don?t want (or cannot ) buy back stock and want to make investments with the additional debt capacity? Aswath Damodaran 24 1. Why should we do it? Effect on Firm Value – Full Valuation Approach ? Step 1: Estimate the cash flows to Disney as a firm EBIT (1 – Tax Rate) = 6829 (1 – ) = $4,234 + Depreciation and amortization = $1,593 – Capital expenditures = $1,628 – Change in noncash working capital $0 Free cash flow to the firm = $4,199 ? Step 2: Back out the implied growth rate in the current market value Value of firm = $ 61,875 = Growth rate = (Firm Value * Cost of Capital – CF to Firm)/(Firm Value + CF to Firm) = (61,875* – 4199)/(61,875 + 4,199) = or % ? Step 3: Revalue the firm with the new cost of capital Firm value = The firm value increases by $1,790 million (63,665 – 61,875 = 1,790) ??F CF F 0 (1 ? g)( Co s t of Ca p i t a l g) ? 4, 1 9 9 ( 1 + g)( . 0 7 5 1 g)??F CF F 0 (1 ? g)( Co s t o f Ca pi t a l g) ? 4, 19 9 ( 8)( . 07 32 8) ? $ 63 , 665 m i l l i onAswath Damodaran 25 Effect on Value: Capital Structure Isolation… ? In this approach, we start with the current market value and isolate the effect of changing the capital structure on the cash flow and the resulting value. ? Firm Value before the change = 45,193 + $16,682 = $61,875 million WACCb = % Annual Cost = 61,875 * = $4, million WACCa = % Annual Cost = 61,875 * = $ 4, million ??WACC = % Change in Annual Cost = $ million ? If we assume a perpetual growth of % in firm value over time, Increase in firm value = ? The total number of shares outstanding before the buyback is million. Change in Stock Price = $1,763/ = $ per share ??A nnu a l S a vi n g s ne xt ye a r( Co s t of Ca pi t a l g ) ? $17 . 1 4( 0 . 0 732 0. 0 068) ? $ 1 , 763 m i l l i onAswath Damodaran 26 A Test: The Repurchase Price ? Let us suppose that the CFO of Disney approached you about buying back stock. He wants to know the maximum price that he should be willing to pay on the stock buyback. (The current price is $ and there are million shares outstanding). If we assume that investors are rational, ., that the investor who sell their shares back want the same share of firm value increase as those who remain: ? Increase in Value per Share = $1,763/ = $ ? New Stock Price = $ + $= $ Buying shares back $ will leave you as a stockholder indifferent between selling and not selling. ? What would happen to the stock price after the buyback if you were able to buy stock back at $ ? Aswath Damodaran 27 Buybacks and Stock Prices ? Assume that Disney does make a tender offer for it?s shares but pays $27 per share. What will happen to the value per share for the shareholders who do not sell back? a. The share price will drop below the preannouncement price of $ b. The share price will be between $ and the estimated value (above) of $ c. The share price will be higher than $ Aswath Damodaran 28 2. What if something goes wrong? The Downside Risk ? Doing Whatif analysis on Operating Ine ? A. Statistical Approach – Standard Deviation In Past Operating Ine – Standard Deviation In Earnings (If Operating Ine Is Unavailable) – Reduce Base Case By One Standard Deviation (Or More) ? B. “Economic Scenario” Approach – Look At What Happened To Operating Ine During The Last Recession. (How Much Did It Drop In % Terms?) – Reduce Current Operating Ine By Same Magnitude ? Constraint on Bond Ratings Aswath Damodaran 29 Disney’s Operating Ine: History Aswath Damodaran 30 Disney: Effects of Past Downturns Recession Decline in Operating Ine 2020 Drop of % 1991 Drop of % 198182 Increased Worst Year Drop of % ? The standard deviation in past operating ine is about 20%. Aswath Damodaran 31 Disney: The Downside Scenario Aswath Damodaran 32 Constraints on Ratings ? Management often specifies a 39。desired Rating39。 below which they do not want to fall. ? The rating constraint is driven by three factors ? it is one way of protecting against downside risk in operating ine (so do not do both) ? a drop in ratings might affect operating ine ? there is an ego factor associated with high ratings ? Caveat: Every Rating Constraint Has A Cost. ? Provide Management With A Clear Estimate Of How Much The Rating Constraint Costs By Calculating The Value Of The Firm Without The Rating Constraint And Comparing To The Value Of The Firm