Professional Documents
Culture Documents
Christina Russell
FIN 6406 Strategic Financial Management
Dr. Frye
Table of Contents
Part 1: The Company
Page: 2 - 5
Page: 6 - 10
Page: 11
Page: 12
Page: 13-14
Page: 15-17
References
Page: 18
Appendices:
A: Income Statement for Disney and Time Warner
Page: 19-22
Page: 23-26
Page: 27-30
Page: 31-41
Page: 42-43
Page: 44
The Company
It all started with a mouse
Mission: The Walt Disney Company's objective is to be one of the world's leading producers
and providers of entertainment and information, using its portfolio of brands to differentiate its
content, services and consumer products. The company's primary financial goals are to
maximize earnings and cash flow, and to allocate capital profitability toward growth initiatives
that will drive long-term shareholder value.
The Walt Disney Company is the worlds largest media and entertainment conglomerate
with assets encompassing media networks, studio entertainment, parks and resorts, and
consumer products. The Walt Disney Companys television and media network assets include
the ABC television network, and ten broadcast stations. In addition, Walt Disneys portfolio of
cable networks include: ABC Family, Disney Channel, Toon Disney, and ESPN (80% ownership).
The Walt Disney Studios produces films through lines such as Walt Disney Pictures, Touchstone,
and Pixar. With the recent acquisition of Marvel Entertainment, the Walt Disney Company
enters as a top comic book publisher and film producer. Studio entertainment produces and
acquires live-action and animated motion pictures for distribution to the theatrical, home video
and television markets. Theme parks and resorts include the operations of the Walt Disney
World Resort in Florida, Disneyland Park, the Disneyland Hotel and the Disneyland Pacific Hotel
in California. Consumer products segment includes merchandise licensing, publishing.
The Walt Disney Company has a prestigious history in the entertainment industry,
stretching over 75 years. Since its inception in 1923, the Walt Disney Company and additional
affiliated businesses have remained committed to produce supreme entertainment experiences
based upon the rich legacy of quality creative content and incomparable storytelling. Within
the past few decades, Disney has moved into a wider market, beginning the Disney Channel on
cable and establishing subdivisions such as Touchstone Pictures to produce films other than the
usual family-oriented fare, gaining a firmer footing on a broader range. Starting in 1984, Disney
enjoyed an enormous creative and financial renaissance, in part to the leadership of CEO
Michael Eisner, the success of all its subsidiaries, sales through the Disney Stores, and a
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However, Disneys largest asset is their ability to stay diversified. Disney is a well-established
conglomerate firm with a solid domination within the theme park and entertainment industry.
Disney already operates through four different business segments which include media
networks, parks and resorts, studio entertainment, and consumer products. Disneys
monumental deal with Apple creating a partnership between Disney and iTunes should provide
an excellent resource to further push the brand and provide a reputable channel to push
product distribution. Overall, Disneys desire to strive for excellence, ability to adapt to change,
and continuing to keep the consumers as the driving force behind the enterprise make Disney
an empire within the media industry.
Weaknesses:
Being a conglomerate of this capacity, the Walt Disney Company holds exceptionally
high sunk costs which could hinder Disneys future financial abilities. In addition to sunk costs,
there is the continual cost of updating all the parks, resorts, hotels, cruise ships, etc. Disneys
brand of quality must be maintained nonetheless it continues to escalate the costs. Although
merchandise aimed at the children segment is a huge market, such a public image can have a
kiddie-stigma attached to the Disney brand name which could deter the young adult
segment. Although Disney is attempting to increase its Internet presence, it cannot compete
with the popularity of properties such as Google.com, Youtube.com, and Facebook.com, which
are either owned or have lucrative deals with Disneys top competitors Time Warner, CBS
Corporation, and News Corporation (Hoovers).
Opportunities:
Disney has many opportunities to continue the firms growth within the industry.
Currently the markets are much more versatile to outsourcing and globalization. The Walt
Disney Company is working towards this global localization through expansion into Europe and
Asia. Approximately twenty-five percent of Disneys operating income comes from outside the
United States and Canada, making continued growth internationally a major competitive
advantage. Disney has invested tremendously in their Research and Development department,
which projects progressive new attractions to pull in consumers. Disneys ability to re-invent
and create limited edition products allows multiple opportunities for sales with new or
improved merchandise.
Threats:
Disney has multiple threats that could negatively impact its profitability in the future.
Disneys major threat comes from its competitors on national, regional, and global platforms.
The high competition and growth of other industry giants pose multiple problems to Disneys
ability to sustain as a leader within the industry. With the recent acquisition of Marvel and
other businesses, Disneys hasty acquisitions could post low or unprofitable sales, resulting in
not only a loss, but a negative impact for the conglomerates brand name. Another threat is
Disneys high pressure and demand in terms of sales, creativity, and innovation while
maintaining its quality status. Finally, due to the recent economic state, employee retention
can pose a threat if employees are let go and work for competitors within the industry.
Competitors:
Disney would fall under the Entertainment Diversified industry category as a service
sector. News Corp., Time Warner Inc., Liberty Media Interactive, Liberty Capital Group, and
Liberty Starz Group are the Walt Disney Companys main competitors within this industry. Even
though the Walt Disney Company is a market leader, these other competitors can pose
definitive difficulties because they are all diversified conglomerates with a solid presence within
the global market.
Growth Potential:
Overall, the Walt Disney Company is poised very well for the future. The successful
leadership of Bob Iger is particularly important to the continued success of the firm. As the
leader, Iger does not assume autonomous control, but puts a great deal of trust in his
associates and top level executives, creating an extraordinary working atmosphere. Igers deal
with Apples Steven Jobs should provide a huge opportunity for growth with this significant
partnership. Disney has a long successful history while still being able to adapt with the
changes within the industry. Under the current leadership, Disney is already a growing part of
the new environment of digital media.
Industry
1.41
1.20
The current ratio measures the companys ability to pay its short-term obligations. The
ratio is mostly used to give an idea of how well a company can pay back its short-term liabilities
with its short-term assets. The Walt Disney Company current ratio of 1.11 is greater than 1,
which means their assets can cover their liabilities. However, the Walt Disney Company is
below both the Industry and its competitor, Time Warner Inc.
The quick ratio (acid test ratio) measures a companys ability to meet its short-term
obligations with its most liquid assets. The quick ratio is a more conservation method to
measure liquidity over the current ratio because it excludes the inventory from the current
assets. If a firm needed had to pay off its short-term obligations immediately, there are
occurrences where the current ratio would overestimate a companys short-term financial
strength. The Walt Disney Company quick ratio is 1.01 versus Time Warners 1.28. This shows
that Disney actually holds less inventory than Time Warner (9% versus 13%), and Disneys quick
ratio is actually less than the industry average as well.
Leverage Ratios
Time Warner
Industry
46.18%
-1.49
61.61%
0.31
The debt to equity ratio indicates what proportion of equity and debt the company is
using to finance its assets. The Walt Disney Company has a low total debt to equity with only
38.23% of their assets are financed with their liabilities. Disneys total debt to equity is lower
than both Time Warner and the Industry average. This implies, relative to the industry, the
Walt Disney Company takes a less aggressive method to finance its growth with its debt,
reducing its risk as a company.
Times Interest Earned is a measure of the firms ability to meet its debt obligations
through interest payments. Time Warners negative time interest earned implies that they
cannot cover their debt; whereas Disney does not have a time interest earned ratio was
missing. After calculating Disneys time interest earned from their 10K, they have a
substantially higher ratio indicting it can meet its debt obligations seven times over.
Assets Management Ratios The Walt Disney Company
Inventory Turnover (TTM)
25.65
Receivable Turnover (TTM)
6.01
Average Collection Period
60.73 days
Total Asset Turnover (TTM)
0.54
(Data for the leverage ratios was taken from Reuters.com)
Time Warner
7.97
4.87
74.95 days
0.29
Industry
11.89
4.97
73.44 days
0.55
The inventory turnover illustrates how often a firms inventory is sold and replaced over
a period. Since inventory is typically the least liquid form of an asset, a high ratio implies strong
sales and effective buying. The Walt Disney Company dominates in terms of inventory turnover
with a higher turnover than both the industry average as well as Time Warner.
The receivable turnover ratio and the average collection period are used to calculate a
companys effectiveness in extending credit as well as collecting debts. The receivables
turnover ratio measures how efficiently a firm uses its assets. The average collection period is
stated in terms of the number of days that credit sales remain in the accounts receivable before
they are collected. Disney has both a better receivable turnover and average collection period,
implying that Disney is working efficiently at collecting their accounts receivables as well as
effectively using their assets.
The total asset turnover is the amount of sales generated for every dollars worth of
assets, the higher the number the better. Although Disney is doing better than Time Warner, it
is still slightly under the industry average, this implies that Disney can do more to enhance
Disneys ability to efficiently use its assets to produce sales or revenue.
Profitability Ratios
The Walt Disney Company
Return on Assets (TTM)
5.37%
Return On Equity (TTM)
9.61%
Net Profit Margin (TTM)
9.93%
(Data for the leverage ratios was taken from Reuters.com)
Time Warner
2.32%
5.47%
8.10%
Industry
5.76%
13.87%
10.36%
The Walt Disney Company has average to below average profitability ratios. The return
on assets (ROA) indicates how profitable a firm is relative to its total assets. The ROA aids in
determining how efficient management is at using the assets it has to generate additional
earnings. The return on equity (ROE) measures a companys profitability by showing how much
profit a firm makes with the money the actual shareholders have invested. Although Disneys
ROA and ROE is better than Time Warner, it is still slightly below the industry averages ROA
and ROE.
The net profit margin indicates how much of every dollar of sales the company keeps in
earnings. Disneys 9.93% means that the company has a net income of approximately $0.10 for
each dollar of sales. Disneys profit margin is greater than Time Warners, indicating that they
have a higher level of earnings compare to its competitor.
Market Value Ratios
P/E Ratio (TTM)
Price to Book Ratio (MRQ)
Time Warner
18.40
1.11
Industry
14.86
1.81
DuPont Identity
The breakdown of the DuPont identity is meant to show the effects of operating efficiency
(PM), asset use efficiency (TATO), and financial leverage (EM). If ROE is unsatisfactory, the
DuPont identity helps locate the part of the business that is underperforming.
Therefore,
Disney 2009
= .0915*.5727*1.87 = 9.80%
Disney 2008
= .1171*.6050*1.93 = 13.70%
Disney 2007
= .1320*.5828*1.98 = 15.24%
= .0946*.3923*1.97 = 7.30%
= -.4581*.2237*2.70 = -28.70%
= .1583*.1959*2.29 = 7.10%
These ROEs will differs from the one listed previously from Reuters.com due to the site using TTM (trailing twelve months), which is more upto-date and accurate. The table is calculated out is derived from the balance sheet and income statement from Google Finance.
The return on equity shows how well a firm uses investment funds to generate earnings
growth. The Walt Disney Companys return on equity and net income has steadily decreased
since 2007, whereas the profit margin has steadily increased. With Time Warners ROEs lower
values against Disney it could imply that it is slightly a more conservative firm. Disneys
decreasing profit margin could mean it is not controlling costs as well as it previously was, its
profit margin has decreased due to Disneys net income decline. In terms of total asset
turnover, Disney is also better than Time Warner which means Disney manages its assets in a
more efficient manner against Time Warner. In 2008, Time Warners net income was in the
negative which lead to a negative return on equity; this is due to a seven billion dollar unusual
expense and a backlash from consumers which lead to damaging publicity.
Growth Rates 2009
Internal
Sustainable
The internal growth rate is the highest level of growth achievable for a firm without
obtaining outside financing. The growth rate calculated for the Walt Disney Company is 4.44%.
Historically, the Walt Disney Company saw internal growth rates of 6.14% and 7.36% for 2008
and 2007 respectively. This continuing decline could be a result of the dismal economy.
However, with the acquisition of Marvel Entertainment, along with new and profitable feature
films, the Walt Disney Company can still attain a positive internal growth rate.
The sustainable growth rate is how much the firm can grow by using internally
generated funds and issuing debt to maintain a constant debt ratio. The Walt Disney
Companys sustainable growth rate is 8.42%. Historically, the Walt Disney Company saw
sustainable growth rates of 12.57% and 15.66% for 2008 and 2007 respectively. Again, a
depressed economy is probably the main culprit notwithstanding, the Walt Disney Company
strong management team can expect to see sustainable growth. Additionally, analysts on Value
Line have forecasted double-digit growth during the next fiscal year.
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r = 11.92%
The data from Value Line Publishing listed a historical dividend growth rate of 10.0% for the
Walt Disney Company and estimated the firms dividend growth rate to be 11.5% until 2014. I
chose to take the average between these two growth rates to give a more accurate depiction of
the potential growth rate which is why 10.75% was used in the above equation. The final
calculation shows that the required rate of return is 11.92%. This number is rational because
11.92% is larger than the 10.75% estimated divided growth rate, and actually closer to the
11.5% estimated dividend growth rate. According to Value Line Publishings data given
according to historical rates and calculating the required rate of return, it is safe to believe the
Walt Disney Company has a stable constant growth. This stability is because Walt Disney has
been growing at a stable rate for over five years.
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Reuters: 1.15
S&P: 1.10
Average: 1.105
The table above lists the beta estimates from four sites along with the average beta
between Google, Value Line, Reuters, and S&P. The beta of a stock is a number that describes
the relation of returns with that of the financial markets as a whole. Since the Walt Disney
Companys beta is almost exactly 1, the company has about as much systematic risk as
expected against the overall market. Beta is pivotal in the capital asset pricing model because it
measures the part of the assets statistical variance that cannot be diminished by the
diversification of the firm, since it is correlated with the return of the other assets within the
firm.
Expected Return Using CAPM
The current risk free interest rate for three-month Treasury bills is .115% as of April 1st,
2010. According to Chapter 9 in the textbook, the historical risk premium rate relative to the
Treasury bills for large-company stocks is 8.4%. Using these two figures, along with the average
beta calculated above, the calculated expected return is 9.397% using CAPM. The required rate
of return that was calculated using the dividend discount model was 11.92% which is
approximately 2.5% higher than the CAPM rate calculated. This is due to a difference with how
beta is estimated which could be smaller than the actual beta. With the currently weak
economy, the low interest yield for Treasury bills may have made the estimate appear lower.
CAPM is a more accurate measure of return due to the fact that the 11.92% return was still
higher than both the historical and future rates given on Value Line. CAPM is also more
accurate because it uses actual current market numbers decreasing the use of estimates used
within the dividend discount model approach.
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$
$
11,495.00
29.98
1,818.30
54,512.634
66,007.634
2,049
5,658
36.21%
2.416%
9.397%
5.22%
After collecting all the information above, the Walt Disney Companys weight in bonds is
17.41% (11,495/66,007.634) and their weight in stocks is 82.59% (54,512.634/66,007.634).
According to marketwatch.com, the Walt Disney Company has multiple different bonds with
yield to maturities of 0.537, 1.224, 1.257, 1.723, 2.405, 2.860, 3.607, 4.125, and 4.009. I
averaged all nine yield to maturities to find the average of 2.416%. The tax rate for the Walt
Disney Company was calculated using Google Finances Income Statements. After estimating
the tax rate, using the CAPM as the cost of equity, and determining the cost of debt I calculated
that the weighted average cost of capital (WACC) to be 5.22%. WACC may not be a sensible
discount rate for all of the Walt Disney Companys capital budgeting projects since the Walt
Disney Company is so diversified with multiple companies within the conglomerate. The Walt
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Disney Company generates revenues through five main segments: Media Networks (44.8%),
Parks and Resorts (29.5%), Studio Entertainment (17.0%), Consumer Products (6.7%), and
Interactive Media (2.0%). The media networks division may be able to take on greater risks due
to the constant need for research and development required in this industry. The parks and
resorts division also requires more capital due to constant updates with operating expenses
and research and development. For all these reasons, the Walt Disney Company may need
different discount rate for each division to more accurately determine the breakdown of debt
and equity.
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PPE
Current Assets
Current Liabilities
NWC (CA-CL)
2009
$34,992
$11,889
$8,934
$2,955
2008
$33,842
$11,666
$11,591
$75
2007
$32,578
$11,314
$11,391
$ (77)
2006
$30,948
$9,562
$10,210
$ (648)
2005
$29,573
$8,845
$9,168
$(323)
Year
Depreciation
2009
Profit
after Tax
$3,307
$1,631
Investment in Fixed
Assets
$1,150
Investment in
Working Capital
$2,880
Free Cash
Flows
$908
2008
$4,427
$1,582
$1,264
$152
$4,593
2007
$4,687
$1,491
$1,630
$571
$3,977
2006
$3,374
$1,446
$1,375
$(325)
$3,770
15
Year
2009
$908
$(3685)
-80.23%
2008
$4,593
$616
15.49%
2007
$3,977
$207
5.49%
2006
$3,770
The free cash flows was taken from the table listed above. The change in free cash flows is
derived from calculating the previous years free cash flows from the current free cash flows.
The growth in free cash flows is calculated by dividing the current years change in free cash
flows over the previous years free cash flows.
According to the data above, the Walt Disney Companys growth rates have steadily
decreased since 2007. In 2009 the growth rate dropped dramatically most likely due to the
acquisition of the Marvel Company. It is probable that the growth rate should begin to increase
as the Walt Disney Company begins to experience profits from the investments and
development from the purchase of Marvel. With the vast differences in these three growth
rates in free cash flows, it is not practicable to calculated rates or even an average of the
growth rates. The use of Value Lines estimated cash flow rate of 10.5% is better because it
uses more historical data which will give a more practical growth expectation for the Walt
Disney Company.
Estimated Value per Share
As stated above, my initial plan was to use Value Lines estimate cash flow rate of 10.5%
and the Weighted Average Cost of Capital of 5.22%. Unfortunately the growth rate is larger
than my WACC so the rate is not applicable. I will use the two-step approach, where the longterm growth rate at the horizon is smaller than the calculated weighted average cost of capital.
Through analysis of the growth rates of the free cash flows that were previously calculated, I
expect that the Walt Disney Companys acquisition of Marvel Entertainment will return to a
standard rate in four to five years. I will assume that at the start of the fourth year the growth
rate will drop to 5.0% from 10.5%, I chose this rate because it is slightly less than half the
growth rate from the previous Value Line estimate, and is still twice as high as the inflation rate.
I derived the inflation rate from the US Inflation Calculate which determined that the average
16
rate for 2010 was 2.35% (2.6 in January and 2.1 in February). The Walt Disney Company is a
strong and consistent conglomerate so I believe it will be growing by more than the inflation
rate.
Forecasted Free Cash Flow @ 5.0% Growth Rate
PV of Cash Flow 3(Horizon Value) =
$501,670.91
$ 908.00
$ 953.40
$1,001.07
$1,051.12
$502,722.03
5.22%
$434,270.20
References
Sanders, Adrien-Luc. The Walt Disney Company. About.com Guide. 30 March 2010.
http://animation.about.com/od/industryprofiles/p/waltdisney.htm.
Hoovers Inc. The Walt Disney Company. 30 March 2010.
http://premium.hoovers.com/subscribe/co/overview.xhtml?ID=ffffrrjfysytjjfykj.
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