Question

Issuer	Callable	Type	Face Value	Coupon	Maturity	Price	Yield
Disney	No	Corp. Bond	$342,347	6.550%	3-15-2033	141.618	2.789%
Disney	No	Corp. Bond	$17,000,000	5.00%	5-19-2041	106	4.35%
Disney	No	Corp. Bond	$8,500,000	5.25%	8-27-2045	97.8	5.80%
Disney	No	Corp. Bond	$12,000,000	4.75%	1-26-2053	103.5	4.63%

How do I find Disney`s cost of debt by this table?

• To find the market value of debt, instead of having to type in the 100+ actual bonds, you can use the information I offer below in the table. All of the bonds are hypothetical (with one exception), and this will make this assignment far easier and less time intensive, while still driving home the learning objectives.
• You still have to use the instructions to find the bond that matures closest to 10 years after today's date - and use that bond as a proxy for Disney's cost of debt.
• What is that bond's yield to maturity here is it 2.789% if I go by the year 2033? as it is closest to the 10 years from now?
• what is the market value of debt here so I can calculate the weights?

Answer 1

First of all, based of the given information in the table, we will calculate market values of bonds which will act as weights for finding the cost of debt for the organization.

Here, market price is nearest to 100, so we assume face values of all the bonds are $100 per bond

Calculation of Market Values and Weights

Bond	Face Values (1)	Price (2)	Market Value or Weights (3)=[(1)/100]*(2)	Yield (4)	For Weighted Yield Calculation (5)=(3)*(4)
1	3,42,347	141.618	4,84,824.9745	2.789%	1352177%
2	1,70,00,000	106	1,80,20,000	4.35%	78387000%
3	85,00,000	97.8	83,13,000	5.8%	48215400%
4	1,20,00,000	103.5	1,24,20,000	4.63%	57504600%
Total	3,78,42,347		3,92,37,824.9745		185459177%

Weighted Average Cost of Debt =

Total of(Yield * MarketValues) Totalof MarketValuescumWeights

185459177 39237824.9745

= 4.7265%

So, the Weighted Average Cost of Bond of Disney is 4.7265%

Using Nearest to 10 year maturing bond as a proxy = The yield to maturity on a U.S. 10-year bond is the preferred proxy for the risk-free rate for U.S. companies. So, generally for the purpose of risk free rate for finding cost of capital and for bonds rate, nearest to 10 year maturity is preferred. But in our case, only weighted average of all the bonds are required to be calculated, so we have to use YTM of all the bonds.

Bond's Yield to Maturity = A bond's yield to maturity (YTM) is the internal rate of return required for the present value of all the future cash flows of the bond (maturity or face value and coupon payments) to equal the current bond price. In case of bond maturing in the year 2033, YTM of 2.789% means at current market price i.e. 141.618, cost of this bond for the organisation is 2.789% per annum.