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Essay / Research Paper Abstract
This 7 page paper looks at the Disney Annual accounts and considers different models of assessing the cost of capital and compares them to the actual cost of equity and cost of debt calculated from the accounts. The bibliography cites 4 sources.
Page Count:
7 pages (~225 words per page)
File: TS14_TEdisequity.rtf
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Unformatted sample text from the term paper:
both debt and equity, in their 2007 accounts there was a total of $60,928 million in capital, this was made up of $ 48,855 million in equity and the rest
in debt. For ay firm the use of capital will have inherent costs, where there is debt the business will pay interest and/or fees associated with the borrowing. The rate
of interest charged by a lender will reflect the associated risk, with higher interest rates charged for higher risks. This is known as the risk premium. If all loans attracted
the same rate of interest there would be no incentive to lend to the higher risks, which would make it difficult to above normal risk companies to borrow money. The
risk premium is the additional payment for the risk that the lender accepts when lending, and as the risk increases so does the reward, this is known as the risk
reward relationship. For Disney there is a very solid company that has a relativity low level of debt and a long term revue stream as well as a good reputation
so the perceived risk is probably quiet low. There is a similar approach seen in the cost of equity. Investors will make an investment in a firm, either directly
or in purchasing the shares in order to make a profit. The same risk and reward relationship is seen here, with investors requiring a higher reward for investing in riskier
businesses. The investors cannot make the demands in the same way as lenders, but they can choose whether nor not to purchase the share or make the investment. The way
that the investment is made will usually be undertaken with consideration of the potential return which may be gained as a result in the growth in the market price for
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