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Read the attached Bloomberg Businessweek article titled "Recessions."

(2) Complete the case study activity on Weighted Average Cost of Capital (WACC) which requires the use of the Bloomberg terminal to investigate Disney's WACC. There are 4 items required in this case. Items 1 & 2 will count 20 points each; Items 3 & 4 will count 30 points each.

You will use the attached Excel File to input data from the Bloomberg terminal

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Bloomberg Businessweek The Year Ahead 2019 Global Economics Recessions ▷ An early warning system for downturns may be giving off mixed signals 20 Historically, the $15.4 trillion U.S. Treasury ­market has offered one of the most reliable barometers for the health of the American economy. Investors are particularly fixated on what’s known as the yield curve, which depicts the yields on government debt of different maturities at a given point in time. The curve usually slopes upward as investors typically demand higher returns for locking up their money for a longer period. Occasionally, the curve flips, with yields on short-term debt exceeding those on longer bonds. That’s normally a sign investors believe economic growth will slow and interest rates will eventually fall. Research by the Federal Reserve Bank of San Francisco has shown that an inversion has preceded every U.S. recession for the past 60 years. The U.S. economy is 37 quarters into what may prove to be its longest expansion on record. Analysts surveyed by Bloomberg expect gross domestic product growth to come in at 2.9 percent this year, up from 2.2 percent last year. Wages are rising as unfilled vacancies hover near all-time highs. With times this good, the biggest betting game on Wall Street is when they’ll go bad. Barclays Plc, Goldman Sachs Group Inc., and other banks are predicting inversion will happen sometime in 2019. The conventional wisdom: Afterward it’s only a matter of time—­anywhere from 6 to 24 months—before a recession starts. But there are reasons to wonder whether the curve’s predictive powers remain intact. In the wake of the financial crisis, the Federal Reserve not only slashed interest rates, it also bought trillions of dollars in long-term government bonds. At one point in 2017, the purchases pushed down the term premium—the extra bonus investors usually get to hold l­ onger-term debt—on 10-year Treasury notes by a full percentage point, according to one study. While the Fed began raising short-term interest rates in December 2015, it didn’t start letting the bonds on its balance sheet mature without replacing them until October 2017, and that ­process is ongoing. The Fed projects three possible rate hikes in 2019. That on its own could be enough to erase much of the gap between short-term rates and longer-term ones. And if the Fed steps up the pace of hikes, we could more easily see an inversion. A pair of researchers at the Brookings Institution in Washington caution that inversion may not necessarily be the harbinger of a downturn this time. In an April web post, Michael Ng and David Wessel wrote that the lingering effects of the Fed’s extraordinary bond-buying program could be distorting the curve by weighing down on the term premium. That means “that U.S. Treasury Yield Curve Nov. 13, 2010 Nov. 13, 2018 4% 3 2 1 0 1-year 5-year 10-year 30-year DATA: COMPILED BY BLOOMBERG relatively small increases in short-term interest rates relative to long-term rates could lead to inversion.” In an Oct. 29 note to clients, Scott Minerd, global chief investment officer at Guggenheim Partners, said that argument is flawed. It fails to recognize that factors such as regulatory changes, including those to money-market mutual funds, and an increase in Treasury issuance have acted in the opposite direction, putting upward pressure on long-term rates. The yield curve, Minerd said, remains as reliable an indicator as ever. �Liz Capo McCormick and Jeanna Smialek Weighted Average Cost of Ca Case Calculations Cost of Capital Components Beta Expected Return of Market Risk Free Rate Tax Rate 0.95 10.4% 3.1% 12.0% Six Flags 0.91 10.4% 3.1% 21.3% Cedar Fair 0.63 10.4% 3.1% 15.4% 1.43 10.4% 3.1% 0.0% 0.82 10.4% 3.1% 8.6% Viacom 0.9 10.4% 3.1% 1.7% Netflix 1.36 10.4% 3.1% 0.0% ULTA 0.64 10.4% 3.1% 24.1% Sally Beauty 0.72 10.4% 3.1% 22.8% Game Stop 0.87 10.4% 3.1% 60.0% Target Disney Parks and Resorts Studio Entertainment Lions Gate Broadcasting and Media Fox Consumer Products Source: Bloomberg All Data Effective 31 October 2018 The BLOOMBERG TERMINAL service and Bloomberg data products (the “Services”) are owned and distributed by Bloomberg Finance L.P. (“BFLP”) in the Pacific islands, Bermuda, China, India, Japan, Korea and New Zealand. BLP provides BFLP with global marketing and operational support BLOOMBERG ANYWHERE, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PROFESSIONAL, BLOOMBERG TERMINAL and BLOOMBERG name, mark or logo. All rights reserved. d Average Cost of Capital Case Calculations omponents Capital Structure Components Pre-Tax Debt Cost Bond Rating Short- Long-Term Equity Term Debt Debt 4.0% A 5.9% BB 5,892 4.0% BB 3,033 5.6% B 3.6% 180,888 2,063 7,955 2 725 3,759 5,312 390 2,468 8,169 BBB 92,053 1,054 18,469 111,576 5.7% BBB 12,158 23 10,065 22,246 7.0% BB 163,153 - 8,337 171,489 14,071 - - 14,071 1,769 3,760 819 2,332 6.9% BB 1,922 5.9% BB 1,513 5,992 Total Capital 17,681 2.5% 157,215 WACC 69 - P. (“BFLP”) except that Bloomberg L.P. and its subsidiaries (“BLP”) distribute these products in Argentina, Australia and certain jurisdictions operational support. The following are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries: BLOOMBERG, BLOOMBERG.COM. Absence of any trademark or service mark from this list does not waive Bloomberg's intellectual property rights in that Weighted Average Cost of Capi Scenario Changes Cost of Capital Components Beta Expected Return of Market Risk Free Rate Tax Rate Pre-Tax Debt Cost Target Disney Six Flags 0.95 0.91 10.4% 10.4% 3.1% 3.1% 12.0% 21.3% 4.0% 5.9% Fed Rate Move Disney Six Flags 0.95 0.91 10.4% 10.4% 3.1% 3.1% 12.0% 21.3% 4.0% 5.9% Credit Rating Change Disney 0.95 Six Flags 0.91 10.4% 10.4% 3.1% 3.1% 12.0% 21.3% 4.0% 5.9% Additional Debt for Fox Acquisition Disney 0.95 10.4% Six Flags 0.91 10.4% 3.1% 3.1% 12.0% 21.3% 4.0% 5.9% Bear Stock Market Disney Six Flags 0.95 0.91 10.4% 10.4% 3.1% 3.1% 12.0% 21.3% 4.0% 5.9% Tax Rate Increases Disney 0.95 Six Flags 0.91 10.4% 10.4% 3.1% 3.1% 12.0% 21.3% 4.0% 5.9% The BLOOMBERG TERMINAL service and Bloomberg data products (the “Services”) are owned and distributed by Bloomberg Finance Australia and certain jurisdictions in the Pacific islands, Bermuda, China, India, Japan, Korea and New Zealand. BLP provides BFLP with limited partnership, or its subsidiaries: BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG from this list does not waive Bloomberg's intellectual property rights in that name, mark or logo. All rights reserved. Average Cost of Capital Scenario Changes Capital Structure Components Bond Rating Equity Short-Term Debt Long-Term Debt WACC Total Capital A BB 157,215 5,892 5,992 17,681 2,063 180,888 7,955 9.1% 8.1% A BB 157,215 5,892 5,992 17,681 2,063 180,888 7,955 9.1% 8.1% A BB 157,215 5,892 5,992 17,681 2,063 180,888 7,955 9.1% 8.1% A BB 157,215 5,892 5,992 17,681 2,063 180,888 7,955 9.1% 8.1% A BB 157,215 5,892 5,992 17,681 2,063 180,888 7,955 9.1% 8.1% A BB 157,215 5,892 5,992 17,681 2,063 180,888 7,955 9.1% 8.1% Finance L.P. (“BFLP”) except that Bloomberg L.P. and its subsidiaries (“BLP”) distribute these products in Argentina, BFLP with global marketing and operational support. The following are trademarks and service marks of BFLP, a Delaware BLOOMBERG PROFESSIONAL, BLOOMBERG TERMINAL and BLOOMBERG.COM. Absence of any trademark or service mark Weighted Average Cost of Capital Case Study Page 1 CASE STUDY WEIGHTED AVERAGE COST OF CAPITAL Analyze how the theoretical concepts of weighted average cost of capital (WACC) connect to the real world by exploring the impact of changing WACC variables on a company. This lesson explores how several companies and industries are impacted by changing variables in the weighted average cost of capital (WACC) formula. To apply WACC learning to real work complexities, we will examine how Boeing is impacted by interest rates in class and then apply the same lessons to Disney for homework. Use these directions as a template or watch the accompanying video tutorial. Web: https://vimeo.com/303712847/ce9e9e8ec8 Terminal: PLYR VOD 332919204 Log in to the Bloomberg Terminal and type DIS, press the F8 equity sector key, type WACC into the command line, and then press GO. Materials HOMEWORK CASE STUDY HANDOUT The Case Study reinforces the class lesson by asking you to compare Disney’s WACC to those of its peers. TERMINAL TUTORIAL VIDEO A brief video explains how to gather WACC from the Bloomberg Terminal. This is the summary WACC page for Disney. The first thing we need to do is time box the data. Under the Period dropdown menu that says MR, for Most Recent, select Q1 and make the year 2018. Web: https://vimeo.com/303712847/ce9e9e8ec8 Terminal: PLYR VOD 332919204 EXCEL SPREADSHEET Calculate WACC for Disney’s peers with this spreadsheet’s data. Case Study From this page we can fill in the capital structure elements of our case’s WACC table, including the capital amounts for equity, preferred equity, and debt. Disney WACC Elements All Data as of First Quarter 2018 To answer the Case Questions, use the accompanying spreadsheet and the Terminal Tutorial provided below. The following instructions illustrate how to gather the necessary data to calculate Disney’s WACC for the first quarter of 2018 from the Bloomberg Terminal. This will help you answer the first case question. The second case question requires you to gather the data for the third quarter of 2018. Cost of Capital Components Capital Structure $ in Millions Beta Equity Expected Return of the Market Preferred Equity Risk Free Rate Short-Term Debt 6,009 Tax Rate Long-Term Debt 20,082 Pre-Tax Cost of Debt Total Capital 161,265 0 187,356 Clicking on the Equity heading in the Cost of Capital table will bring up the terminal’s WACC worksheet for Disney’s equity. © Bloomberg L.P. Weighted Average Cost of Capital Case Study Page 2 instead of the calculation methodology used by Bloomberg here. Disney WACC Elements All Data as of First Quarter 2018 Cost of Capital Components Beta Expected Return of the Market Risk Free Rate Tax Rate Pre-Tax Cost of Debt Notice there are equity elements that may not have been included in the textbook. That’s okay. Let’s go through this page to fill in the data in our table. The beta for Disney’s stock is 1.07, the risk free rate is 2.41%, and the expected return of the market is 9.17%. This is all the data we need for equity in order to satisfy our simplified WACC formula. Capital Structure 1.07 Equity $ in Millions 161,265 9.17% Preferred Equity 2.41% Short-Term Debt 6,009 17.79% Long-Term Debt 20,082 Total Capital 0 187,356 In the command line, let’s type RELS, which is the function for Related Securities, and press Enter or . Click the Bonds category on the right. Let’s click the R column to sort by the most actively traded of Disney’s bonds. Select the series with the highest relevance indicator. Disney WACC Elements All Data as of First Quarter 2018 Cost of Capital Components Beta Capital Structure 1.07 Equity $ in Millions 161,265 Expected Return of the Market 9.17% Preferred Equity 0 Risk Free Rate 2.41% Short-Term Debt 6,009 Tax Rate Long-Term Debt 20,082 Pre-Tax Cost of Debt Total Capital 187,356 Let’s click on the Cost of Debt tab so we can fill in another cell of our table. Disney’s marginal tax rate is 17.79%. We need to find Disney’s pre-tax cost of debt. It is listed on this table but the textbook uses the yield to maturity of the company’s bonds, From the popup menu, select YAS (Yield and Spread Analysis). Change both the date boxes to March 29, 2018, the last trading day of Q1, and press Enter. Next to the Yield field, change Wst to Mty for Yield to Maturity and press Enter. This bond has a yield to maturity of 3.68%. Disney’s WACC © Bloomberg L.P. Weighted Average Cost of Capital Case Study table is now complete and ready to be used to answer the first case question. Disney WACC Elements All Data as of First Quarter 2018 Cost of Capital Components Beta Capital Structure 1.07 Expected Return of the Market Risk Free Rate Tax Rate Pre-Tax Cost of Debt Equity $ in Millions 161,265 9.17% Preferred Equity 2.41% Short-Term Debt 6,009 17.79% Long-Term Debt 20,082 3.68% Total Capital 0 Page 3 Beta The beta of a stock is a representation of how the stock moves with the broader equity market. Disney has a beta of 1.07 which implies that when the broad equity market goes up or down by one percent, Disney’s stock will rise or fall by 1.07 percent. Low beta stocks, between 0.5 and 0.8, tend to be defensive. They do not rise much when the market rises, but they also do not fall significantly when the market falls. Disney’s beta indicates a closer relationship to the market than any of its peers used in this case. 187,356 Betas of Companies Comparable to Disney Segments All Data as of October 31 2018 1.6 1 Calculate Disney’s weighted average cost of capital (WACC) using the data provided in this case for the first quarter of 2018. (Bloomberg includes more elements in the WACC calculation than the textbook does, so for our purposes let’s use the textbook formula with the data points from Bloomberg.) 1.43 1.36 1.4 1.2 1.0 0.95 0.91 0.8 0.82 0.90 0.87 0.64 0.63 0.72 0.6 0.4 0.2 0.0 Disney 2 Use the Bloomberg Terminal to gather the necessary data to make a similar calculation for the third quarter of 2018. Use the path described in the above Terminal tutorial, but instead of selecting Q1 at the start, select Q3. 3 Using the accompanying spreadsheet, calculate the WACC of each Disney segment comparable. Describe the primary WACC drivers that explain the differences between the WACC of Disney and its comparables. Companies within the same sector typically share similar capital structures and costs of capital. For example, most power utilities are engaged in fundamentally the same business; generation, transmitting, and distributing electric power. The utility business is highly dependent upon expensive fixed-asset investments (i.e., power plants) which are often financed with debt. Consequently, analysts expect companies within the same sector or industry to have similar betas, capital structures, bond ratings, and WACCs. Disney is a diversified entertainment company. Its diversification exists because its revenues come from four different, but related, business segments--parks and resorts, studio entertainment, broadcasting and media, and consumer products. Since there is no other enterprise quite like Disney, we examine the WACCs of companies that operate within one or more of its segments. Six Flags Cedar Fair Lion's Gate Fox Viacom Netflix Ulta Sally Game Beauty Stop Expected Return of the Market The expected return of the market is a fairly general observation. In reality, no one knows by what degree the stock market will rise or fall over the next year. Nevertheless, in order to assess an individual stock we must have a view on where the broader market is heading. The expected return of the market is the same for every stock. Risk Free Rate The risk free rate is the U.S. government bond. A U.S. bond’s yield is considered risk free because the U.S. has not and is not expected to default. Tax Rate The company’s tax rate impacts the after tax cost of debt but has no bearing on either the cost of preferred equity or common equity. The higher a company’s tax rate the lower the after tax cost of debt. Consequently, as a source of capital, debt is a tax shield. Pre-Tax Cost of Debt The pre-tax cost of debt can be determined by calculating the yield to maturity on the company’s bonds. A bond’s yield to maturity can be influenced by many factors including inflation, credit quality, macroeconomic fundamentals, and how the company’s bonds are structured. Student Worksheet Open the WACC Comparisons tab on the accompanying spreadsheet for this lesson. Using formulas and the data provided, calculate the WACC in the last row of the table for Disney and its peers. © Bloomberg L.P. Weighted Average Cost of Capital Case Study Page 4 In the WACC Sensitivity tab on the accompanying spreadsheet, alter the cells as described below to see how changes to WACC’s inputs impact the WACC. Write a few sentences describing each change.  4     an increase in the Federal Reserve reference rate a two notch downgrade in Disney’s credit rating adding debt to Disney’s capital structure for an acquisition a downturn in the US equity market an increase in Disney’s marginal income tax rate Fed Rate Increase An increase of the Federal Reserve interest rate by 200 basis points (2.0%) lifts the borrowing costs of every debt issuer. What is Disney’s adjusted WACC? Credit Rating Change A two notch downgrade in Disney’s credit rating should increase its cost of debt to the same level as Six Flags, all other conditions being equal. What is Disney’s adjusted WACC? Debt for Acquisition In 2018, Disney announced it would acquire Twenty-first Century Fox assets for $71.3 billion. Assume Disney paid for the acquisition in cash by raising additional debt. What is Disney’s adjusted WACC? U.S. Equity Market Downturn Equity market expectations may cool resulting in an expectation that equity markets may only expand by 200 basis points (2.0%) over the coming year. What is Disney’s adjusted WACC? Increased Marginal Tax Rate The tax rate cut has ended. A new administration is in power. Assume Disney’s marginal tax rate rises to 30.0%. What is Disney’s adjusted WACC? THE BOTTOM LINE WACC creates an opportunity for investors to be more rigorous about discount rates. Rigor is important, but it’s worth remembering that every element we include in the WACC calculation is determined by assumptions. The BLOOMBERG TERMINAL service and Bloomberg data products (the “Services”) are owned and distributed by Bloomberg Finance L.P. (“BFLP”) except that Bloomberg L.P. and its subsidiaries (“BLP”) distribute these products in Argentina, Australia and certain jurisdictions in the Pacific islands, Bermuda, China, India, Japan, Korea and New Zealand. BLP provides BFLP with global marketing and operational support. The following are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries: BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PROFESSIONAL, BLOOMBERG TERMINAL and BLOOMBERG.COM. Absence of any trademark or service mark from this list does not waive Bloomberg's intellectual property rights in that name, mark or logo. All rights reserved.
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