What is the return, risk and risk-adjusted performance of Disney’s common stock (ticker symbol DIS) over the last ten years?What is the cost of capital for Disney?Discuss.

The assessment for the course is split into two parts: Part A Proposal (a group

assignment that counts for 30%) and Part B Financial Model (an individual

assignment that counts for 70%). Together, the two parts of the assignment

involve the design and construction of a financial model. In Part A you were

required to write a proposal for the financial model, while in Part B (i.e. this

assignment), you are required to implement a revised version of the

financial model.

The original task is summarized as follows: The financial model is to be used to

provide answers to the following questions about the Walt Disney Company:

• What is the return, risk and risk-adjusted performance of Disney’s common

stock (ticker symbol DIS) over the last ten years?

• What is the cost of capital for Disney?

Requirements of the Assignment

For this assignment, you should undertake the following tasks:

Task 1: Estimate the following performance measures for both Disney and the

S&P 500 using simple monthly returns for the period 01/12/2010 to

01/11/2020 (120 observations): mean, standard deviation, 1-month 99% VaR

and CVaR, Sharpe ratio. Use the current 3-month US Treasury bill yield as a

proxy for the risk-free rate

Task 2: Estimate the weighted average cost of capital for Disney using the

following parameters:

Cost of debt: based on ‘Interest expense, net’, ‘Current portion of borrowings’

and ‘Borrowings’ from the 2019 annual report

Tax rate: based on ‘Income taxes from continuing operations’ and ‘Income from

continuing operations before income taxes’ from the 2019 annual report

Cost of equity: calculated using the CAPM

Risk-free rate: current 30-year US Treasury bond yield

Beta: estimated using monthly returns from 01/12/2015 to 01/11/2020 (60

observations), using the S&P 500 as proxy for market portfolio

Market risk premium: From survey1

Value of debt: ‘Current portion of borrowings’ and ‘Borrowings’ from the 2019

annual report

Value of equity: based on latest share price and number of shares outstanding

from Yahoo Finance

1 For example, Fernandez, P., de Apellániz, E., and Acín, J., 2020, Survey: Market

Risk Premium and Risk-Free Rate used for 81 countries in 2020. Available at:

SSRN: https://ssrn.com/abstract=3560869

Task 3: Undertake one or more sensitivity analyses to explore the robustness of

the estimated WACC to the assumptions made.

You should write up the completed financial model in a report of no more than

2,000 words, excluding title page, tables and figures, formulas and references.

In writing up your report, you should adhere to the following guidelines:

• Your report should be professionally presented. You could assume that it will

be read by the senior management of the company and so it needs to be neat,

properly structured and clearly and concisely written. This is an important

skill in practice.

• You should use the following structure for your report:

Title page

Executive summary: this should briefly summarise the analysis and its main

findings.

Method and data: this should concisely describe your calculations and the

data on which they are based

Results: this presents the results of your financial model, including the

sensitivity analysis. You should provide a critical discussion of your results.

Conclusion: this should summarise the main findings of the model, critically

evaluate any shortcomings of the data and method, and offer some

suggestions for future work

References: these should be alphabetically listed and properly formatted

(see below)

• You should NOT include appendices in your report

• You should make creative use of properly presented tables and charts. Tables

and charts should be accompanied by detailed explanatory notes. Look at any

paper in a good finance journal to see how to present a table of results (I have

put a sample of a Journal of Financial Economics paper in the Assessment

Information section , but feel free to look at others also).

• Do NOT include Excel screen prints. Also, you do NOT need to describe the

specific steps you took in Excel or the functions used.

• You should pay attention to the formatting of your reports, particular with

respect to line spacing, paragraphs and section titles

• You should use Equation Editor in Microsoft Word to format any equations

• You should define any variables that are used in equations

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