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FIN - Dillard?s Data Case




Question;Dillard?s Data CaseYou work in Dillard?s department stores corporate finance and treasury department andhave just been assigned to the team estimating Disney?s WACC. You must estimate thisWACC in preparation for a team meeting later today. You quickly realize that theinformation you need is readily available online.1.Go to Under ?Market Summary,? you will find the yield tomaturity for ten-year Treasury bonds listed as ?10 Yr Bond (%).? Collect this number asyour risk-free rate.2.In the box next to the ?Get Quotes? button, type Dillard?s ticker symbol (DDS) and pressenter. Once you see the basic information for Dillard?s, find and click ?Key Statistics? onthe left side of the screen. From the key statistics, collect Dillard?s market capitalization(its market value of equity), enterprise value (market-value equity + net debt), cash, andbeta.3.To get Dillards cost of debt and the market value of its long-term debt, you will need theprice and yield to maturity on the firm?s existing long-term bonds. Go to Under ?Quick BondSearch,? click ?Corporate? and type Dillards ticker symbol. A list of Dillard?s outstandingbond issues will appear. Assume that Dillard?s policy is to use the expected return onnoncallable ten-year obligations as its cost of debt.Find the noncallable bond issue that is as close to 10 years from maturity aspossible. (Hint: You will see a column titled ?Callable?, make sure the issue youchoose has ?No? in this column.)Find the yield to maturity for your chosen bondissue (it is in the column titled ?Yield?). Hold the mouse over the table ofDisney?s bonds and right-click. Select ?Export to Microsoft Excel.? (Note thatthis option is available in IE, but may not be in other browsers.) An Excelspreadsheet with all of the data in the table will appear.4.You now have the price for each bond issue, but you need to know the size of the issue.Returning to the Web page, click ?Dillard?s? in the first row. This brings up a Web pagewith all of the information about the bond issue. Scroll down until you find ?AmountOutstanding? on the right side. Noting that this amount is quoted in thousands of dollars(e.g., $60,000 means $60 million =$60,000,000), record the issue amount in theappropriate row of your spreadsheet. Repeat this step for all of the bond issues.;5.The price for each bond issue in your spreadsheet is reported as a percentage of thebond?s par value. For example, 104.50 means that the bond issue is trading at 104.5% ofits par value. You can calculate the market value of each bond issue by multiplying theamount outstanding by (Price ? 100). Do so for each issue and then calculate the total ofall the bond issues. This is the market value of Dillard?s debt.;6.Compute the weights for Dillard?s equity and debt based on the market value of equityand Dillard?s market value of debt, computed in Step 6.7.Calculate Dillard?s cost of equity capital using the CAPM, the risk-free rate you collectedin Step 1, and a market risk premium of 5%.8.Assuming that Dillard?s has a tax rate of 35%, calculate its effective cost of debt capital.9.Calculate Dillard?s WACC.10.Calculate Dillard?s net debt by subtracting its cash (collected in Step 2) from its debt.Recalculate the weights for the WACC using the market value of equity, net debt, andenterprise value. Recalculate Dillard?s WACC using the weights based on the net debt.How much does it change?How confident are you of your estimate? Which implicit assumptions did you makeduring your data collection efforts?


Paper#50290 | Written in 18-Jul-2015

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