Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 535

Current EBIT ( 1 - t) $ 3,417

The Investment Decision Invest in projects that earn a return greater than a minimum acceptable hurdle rate

The Dividend Decision If you cannot find investments that earn more than the hurdle rate, return the cash to the owners of the businesss.

The Financing Decision Choose a financing mix that minimizes the hurdle rate and match your financing to your assets.

Investment decision affects risk of assets being finance and financing decision affects hurdle rate

Return on Capital 15%

Reinvestment Rate 53.18% Expected Growth Rate = 15% * 53.18% = 7.98%

Existing Investments ROC = 8.59%

New Investments Financing Mix D=30%; E= 70%

Financing Choices Debt in different currencies with duration of 4 years

Cost of capital = 10.53% (.70) + 3.45%(.30) = 8.40%

Disney: The Value of Control

YCuerarrent Expected GrowtEBITh $ 5 , 327 EBIT ( 1 - t) Reinvestment RRaeteinvestmentFCFF Cost of capitalPV of FCFF 21 77 ..^9988 %% $$ 65 ,, 271512 $$ 33 ,,^6809645533 .. 1188 %% $$ 21 ,, 097118 $$ 11 ,,^68828388 .. 4400 %% $$ 11 ,, 555581 43 77 ..^9988 %% $$ 76 ,, 274016 $$ 44 ,,^2504505533 .. 1188 %% $$ 22 ,, 421346 $$ 21 ,,^91629688 .. 4400 %% $$ 11 ,, 553459 65 77 ..^9188 %% $$ 87 ,, 388109 $$ 54 ,,^9205245503 .. 5184 %% $$ 22 ,, 665067 $$ 22 ,,^25995988 .. 1460 %% $$ 11 ,, 650335 87 65 ..^3599 %% $$ 98 ,, 491145 $$ 55 ,,^5990024457 .. 2917 %% $$ 22 ,, 667728 $$ 32 ,,^92132077 .. 6961 %% $$ 11 ,, 761677 109 44 ..^8000 %% $$ 109 ,, 286605 $$^66 ,, 413835 4402 .. 0640 %% $$^22 ,, 567373 $$^33 ,, 856408 77 ..^4116 %% $$ 11 ,, 775863 Terminal Value $ 126 , 967 $$ 5784 ,, 960450 $ 7 $^38 ,, 343322

$ (^1) $ 41 ,, 634359
$ (^6) $ 23 , 03. 4459
Value of Operating Assets = + Cash & Non-op Assets =
Value of firm - Debt
(^) Value - Optionsof equity in stock =
Value per share

We changed three inputs:

1. We assumed that the return on capital on existing assets to the cost of

capital of 8.59%, which increases the after-tax operating income to $3, 417

million

2. We assumed that new investments would earn a higher return on capital

(15% instead of 12%)

3. The firm would move to its optimal debt ratio of 30% immediately and keep

its existing debt on its books (at favorable interest rates). This reduces the

cost of capital to 8.40%.

The net effect is that the value per share increases to $30.45. The difference

between this value and the value per share with the status quo (on last page)

is the value of control; value of control = 30.45 - 11.14 = 19.31 per share.