Session 8: Weights and Cost of Capital Dynamics. Weights for Cost of Capital Calculation. The weights used in the cost of capital computation should be market values. There are three specious arguments used against market value
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Disney’s total debt due, in book value terms, on the balance sheet is $16,003 million and the total interest expense for the year was $728 million. Assuming that the maturity that we computed above still holds and using 6% as the pre-tax cost of debt:
Estimated MV of Disney Debt =
No maturity was given for debt due after 5 years. I assumed 10 years.
= MV of Interest bearing Debt + PV of Operating Leases
= $14,962 + $ 1,720= $16,682 million
Disney reported $619 million in commitments after year 5. Given that their average commitment over the first 5 years of $302 million, we assumed two years @ $309.5 million each.
= (3.5%+2.5%) (1-.38) = 3.72%