7. Suppose egressing changes in firm value of Disney against changes in interest

Question

7. Suppose egressing changes in firm value of Disney against changes in interest rates (T-bond rate) over a 20-year period yields the following regression: Change in Firm Value = 0.1870-2.8634 (Change in Interest Rates) (2.65) (2.45) (a) What does the regression say about the relationship between change in firm value and change in interest rates (on average). Express the relationship in quantitative term. (b) What should be the duration of Disney's assets collectively based on the regression output above? (5)

Explanation / Answer

Regression Equation: Change in Value of firm = 0.187 - 2.8634 (Change in interest rates)

Above equation shows that every 1% change in interest rate leads to 2.8634% change in value of firm

It is worth noting that change in interest rates have negative sign which means negative relationship between change in value of firm and change in interest rates.

Therefore, every 1% increase in interest rate leads to 2.8634% decrease in value of firm. This makes sense also. Because we know that increase in interest rates lead to decrease in value of firm as WACC (discounting rate) of firm increases.

b) 1% increase in interest rates leads to (0.1870 - 2.8634) 2.6764% decrease in firm value. Therefore, duration of Disney's assets is 2.6764

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