Corporate Finance: Instructor\'s Manual Applied Corporate Finance

(Amelia) #1
Aswath Damodaran 340

Disney: The Downside Scenario


% Drop in EBITDA EBIT Optimal Debt Ratio
0 % $ 2 , 805 30 %
5 % $ 2 , 665 20 %
10 % $ 2 , 524 20 %
15 % $ 2385 20 %
20 % $ 2 , 245 20 %

The optimal debt ratio is lower, as you would expect it to be, but it drops to 20%


and stays at 20% for large drops in operating income. You can try what if


analyses on the other variables, but this approach to setting leverage is based


primarily upon cash flows (which are measured by the EBITDA). The effect of


changing the other variables will be fairly small.

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