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If you are able to determine the current market value of a company‟s debt, then use this value when
calculating capital structure weights. Because of the difficulties in determining this number, financial
analysts are often forced to use book values of debt as proxies for market values. This is not as
problematic as it may sound, however, because as long as the company‟s bonds are being traded at a
yield to maturity close to the coupon interest rate paid by the bonds, then the market value of the
bonds will be very close to their book values. Again, in an ideal world, market values of long-term
debt are used when calculating capital structure weights, but if these market values are not available,
use book values of long-term debt as proxies.
Continuing with the Walt Disney Company to illustrate cost of capital, when this chapter was
written, the most recent available balance sheet book value for long-term debt was $11.522 billion, for
common equity this value was $32.323 billion, and Disney did not have any preferred stock
outstanding. At the same time, the price per share of Disney common stock was $23.36 and Disney
had 1.876 billion shares of common stock outstanding, which, when multiplied together, produces a
market value of equity of $43.82336 billion.
With the above information about the value of Disney‟s long-term debt ($11.522 billion), common
equity ($43.82336 billion), and preferred equity ($0), we can determine the relative weights of longterm
debt, common equity, and preferred equity in Disney‟s capital structure:
Exhibit 5.8 Inputs for Disney’s cost of capital (percents).
Based on these values of Disney‟s long-term debt and common and preferred equity, Disney‟s
capital structure is 20.82% long-term debt, 79.18% common equity, and 0.0% preferred equity.
From our work we now have all the inputs necessary to calculate Disney‟s cost of capital, as
presented in Exhibit 5.8. The complete cost of capital calculation for the Walt Disney Company is also
shown in the cost of capital template included in the chapter materials. This template can be used to
determine the cost of capital for any company.
When this information is input into the weighted average cost of capital formula, the result is: