Group project for Corporate Finance Course

Part 1

Analysis of Walt Disney Corporation

Group # 10

Professor:

Yulia B. Ilina

Group Members:

Afanasyeva Ekaterina

Andreeva Ekaterina

Belyaeva Tatiana

Chumak Anastasia

Konchalenkov Dmitry

Kopp Grigory

Prisivko Viacheslav

Toeroek Julianna

Saint-Petersburg

2012

Contents

Part I Task-list. 3

Chapter 1. General characteristics of the company. 4

Chapter 2. Valuing bonds. 8

Industry 12

Composite Bond Rate 14

Conclusion 15

Chapter 3. Valuing stocks. 16

General description of Walt Disney Company stocks. 16

Stocks Evaluation 17

Market Impact on Company’s Stock 20

Chapter 4. Estimating cost of capital. 21

Cost of common stock 24

1. CAPM 24

2. Dividend-Yield-Plus-Growth-Rate or Discounted Cash Flow Approach 26

3. Over-own-bond-yield-plus-judgmental-risk-premium approach 30

Comparison of the models: 31

The cost of capital 31

Table of Figures 34

Part I Task-list.

1. General characteristics of the company

Organizational form, owners, size, industry, markets it is operating in, main competitors, key data on securities etc.

2. Valuing bonds:

Bonds issue should be analyzed, specifying the following characteristics of the offering: underwriters, credit rating, purposes (project financing, mergers & acquisitions etc.), amount of the issue, coupon rate, term, callable or non-callable, secured or not, yields and price dynamics, fair value (based on valuation models discussed in class), factors that influenced the price and yields, financial crisis impact, and special information (if available): if there were defaults on bonds or some other features. As company could have issued different types and tranches of bonds, you are supposed to provide general information on these types, but choose the most recent one for your valuation.

3. Valuing stocks:

Describe the company’s stocks in general: what market are they traded on? What are types (type) of stocks did the company issue? What is the dividend history for the recent period (3-5 years)? Provide company’s stock’s valuation and estimation of the stock return for the current moment, based on both dividend discount models and CAPM.

Estimate company’s beta coefficient. Use stock’s and market returns on a monthly or weekly basis (depends on the liquidity) at least for 2 years. For calculation of the returns use closing (settlement) prices of the day as available from the trading systems or other sources of data. As a market return take a market index (RTS, S&P 500 etc.).

Describe the current situation with company’s stocks. What factors (economic, industry-specific, and company-specific) do impact the market for company’s stock? Make conclusions.

4. Estimating cost of capital:

Estimate company’s cost of equity, cost of debt and WACC, based on various methods considered in the course. Ignore flotation costs. Use book values for both debt and equity as weights if market data on the debt is not available.

Make conclusions, what factors impact your company’s cost of capital, what specific features you may indicate. Did different methods of estimation of the cost of equity demonstrate the same result? What methods used would you recommend for the company and investors while estimating the cost of capital?

Chapter 1. General characteristics of the company.

16 October 1923 is the start of the Disney history. This is the date when the contract about producing a series of Alice Comedies was signed by Walt and Winkler. Initially, the company was named the Disney Brothers Studio. Nowadays, Walt Disney is one of the biggest media conglomerates in the Unites States of America with a lot of subsidiaries (for example, Pixar Animation Studios, Jetix Europe, Marvel Entertainment, etc.), which is rated on the Fortune 500 list of the biggest companies. The main company’s goal is stated on the official site of the Walt Disney Company as “to maximize earnings and cash flow, and to allocate capital toward growth initiatives that will drive long-term shareholder value”. The Company employed approximately 156,000 people as of October 2, 2011. The company has diversified business and operates in 5 business segments: media networks, parks and resorts, studio entertainment, consumer products and interactive media. The sector of the company can be described as services, while the industry it works in is diversified entertainment.

The brief description of every segment of Walt Disney’s business is shown in the table below, which is based on the information provided by http://thewaltdisneycompany.com and the Walt Disney Company annual report 2011

Table 1 Brief Description of Walt Disney's Businesses by Segment

Segment	Description
Media networks	Media Networks comprise an array of broadcast, cable, radio, publishing and digital businesses across two divisions – the Disney/ABC Television Group and ESPN Inc. In addition to content development and distribution functions, the segment includes supporting headquarters, communications, digital media, distribution, marketing, research and sales groups. Revenues come from selling time for commercial announcements, fees to cable, satellite and communication service providers, and from fees for some networks as well.
Parks and resorts	At the heart of P&R are five world-class vacation destinations with 11 theme parks and 43 resorts in North America, Europe and Asia, with a sixth destination currently under construction in Shanghai. P&R also includes the Disney Cruise Line with its four ships - the Disney Magic, Disney Wonder, Disney Dream and Disney Fantasy; Disney Vacation Club, with 11 properties and more than 500,000 individual members. Adventures by Disney is also a part of P&R, which provides guided family vacation experiences to destinations around the globe. The main stream of revenues are from the sale of admissions to the theme parks; charges for room nights at the hotels; merchandise, food and beverage sales; sales and rentals of vacation club properties; and sales of cruise vacations.
The Walt Disney studios	Feature films are released under the following banners: Disney, including Walt Disney Animation Studios and Pixar Animation Studios; Disneynature; Marvel Studios; and Touchstone Pictures, the banner under which live-action films from DreamWorks Studios are distributed. The Disney Music Group encompasses the Walt Disney Records and Hollywood Records labels, as well as Disney Music Publishing. The Disney Theatrical Group produces and licenses live events, including Disney on Broadway, Disney On Ice and Disney Live! Revenues come from the licensing fees from the third parties to distribute the media property of the company, from production and distribution of various media services.
Disney consumer products	Consumer products business includes merchandise ranging from apparel, toys, home décor and books and magazines to foods and beverages, stationery, electronics and fine art. Other businesses involved in Disney's consumer products sales are Disney Publishing Worldwide, the world's largest publisher of children's books and magazines, and www.DisneyStore.com and www.DisneyStore.co.uk, the company's official shopping portals. Revenues flows are from royalties and from themed promotional campaign organized for retailers, from the sales of products and franchises.
Disney Interactive	Interactive entertainment across all digital media platforms, including blockbuster mobile, social and console games, online virtual worlds, and web destinations Disney.com and the Moms and Family network of websites. The company receives revenue from wholesale sales, licensing, advertising, sponsorships, subscription services and online game accessories.

As it can be understood Disney is involved in many operations, so it has both products and services. We would like to sum up the information about the area of operations of Disney by providing the table with the brief summary of the Disney’s activity extracted from MarketLine database.

Table 2 Brief summary of the Disney’s activity

Products	Character-based merchandise	Services
Television programs Motion pictures Plays Musical recordings Books Magazines Video games Mobile phones	Toys Apparels Accessories Footwear Home furnishings Home decor Cosmetics Stationery Consumer electronics	Entertainment program broadcasting Radio networks Radio stations Resorts Vacation club Cruise line Theme parks

As a conglomerate, Walt Disney operates on several markets, that is why, it has many different competitors in the different business segments. As of now, Disney is a leader in the sector of diversified entertainment in the United States. For the most part, main competitors of the corporation are other media conglomerates, such as News Corporation, Time Warner Inc., Viacom, CBS Corporation, UTV Software Communications Ltd., which are also companies of the Fortune 500 list. However, there are other small competitors as well, such as Fox Entertainment Group and Liberty Media Corporation. But considering the business of theme parks, we can point out to other competitors, including the Lego Group (with Legolands), Six Flags Entertainment Corporation, Paramount Parks Inc., Starwood Hotels and Resorts Worldwide Inc., etc. Besides describing the particular competitors of Disney, we would like to provide the general information about the types of competitors Disney faces on every segment it operates in. The results are in the form of a table which was developed on the basis of the information in the Walt Disney Company annual report 2011.

Table 3 Walt Disney’s Competitors by Segment

Segment	Types of competitors
Media networks	Other television and cable networks, independent television stations and other media, such as DVDs, video games and the internet
Parks and resorts	Other forms of entertainment, lodging, tourism and recreational activities
Studio entertainment	All other forms of entertainment
Consumer products	Other licensors, publishers and retailers of character, brand and celebrity names
Interactive media	Other online sites and products

The company is included in such market indexes as Dow Jones Composite and Dow Jones industrial.

Disney provides the following financial information: its statement of income, balance sheet, statement of cash flows and statement of shareholder’s equity. As for ownership, Walt Disney is a private company owned by individual and institutional shareholders. The total value of all shares is around 90 billion dollars. According to http://finance.yahoo.com , around 70% shares are hold by institutions, while the total number of shares outstanding is 1 800 000 000. Moreover, there are no preferred stocks of Disney. There are 1 239 institutional holders of Disney’s shares, the 5 top holders are FMR LLC, Vanguard Group Inc., Massachusetts Financial Services Co., BlackRock Institutional Trust Company and Price (T.Rowe) Associates Inc. Major direct holders are Iger Robert, Braverman Alan, Pepper John, Estrin Judith and McCarthy Christine. Walt Disney Corporation also issues bonds. For the time being, there are 7 types of bonds on the market. All bonds have A Fitch rating, and they are not callable, and with semi-annual coupon payment frequency. As it is stated in the Certificate of Incorporation of the company, there were preferred stock previously, but currently there are no official preferred stocks of Disney on the market.

The next sections will analyze these issues in greater details.