Walt Disney business outline

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Please write an outline following the four milestone and the final rubric. It must cover the major points that will be included in Financial Analysis and Planning report.

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Final Project Guidelines and Rubric Capstone Component 1: Financial Analysis and Planning Report For Component 1 of your capstone, you will develop a comprehensive financial analysis and planning report that lays out your firm’s current and projected financial performance in light of market conditions. Your report should also suggest potential investment opportunities and strategies for managing risk for the executive management team to discuss in strategic planning. In order to provide an appropriate context for your analysis and recommendations, you should look at your company’s financial performance over the past three years. (You may also include historical information prior to this time horizon if relevant. However, keep in mind that the report is not intended as a historical analysis of the company, but rather as a tool for strategic planning.) You should also project forward at least three years in your modeling and recommendations for the future. Remember that you are communicating to the executive leadership team, so your report should be succinct, clear, and well supported throughout by credible research and evidence, including relevant spreadsheets, charts, and graphs. Specifically, the following critical elements must be addressed: I. Executive Summary: Briefly provide the “bottom line” of your financial analysis and key recommendations to a busy executive audience. II. Current Financial Status: Analyze the position of the firm and whether the company regressed or improved financially over the past three years. Be sure to situate your company within the broader economy and its specific industry, particularly with respect to major competitors and industry and market trends. Your analysis, supported by relevant spreadsheets and graphs, must include, but need not be limited to, the following: A. Liquidity B. Efficiency C. Profitability D. Market Value E. Leverage III. Projections: Based on the company’s financial statements, your analysis, and any additional evidence, project the company’s performance for the next three years. Are there any areas of concern? Is the company in good financial shape for moving forward? Discuss a best-case, worst-case, and most likely scenario, including a sustainable growth rate for sales based on existing financial statements and any macroeconomic and financial market conditions that might impact the firm’s strategic objectives. You must thoroughly address the assumptions behind your predictions, supported by spreadsheet calculations. At a minimum, your analysis must cover: A. Weight of equity B. Weight of debt C. Cost of debt D. Cost of equity E. Tax rate F. Value of the company’s stock compared to your forecasted value and free cash flow IV. International Market Analysis: Articulate the company’s position with respect to at least one of the foreign markets in which it operates. Use statistical regression to predict the exchange rates for the next year. How does the company manage foreign exchange risks, and what, if anything, might it do differently? V. Recommendations: Provide high-level, strategic recommendations for your company for the upcoming three years, based on your analysis and interpretations. Where are there opportunities for growth? What risks does the company face, and how might it mitigate them? Apply relevant principles of asset allocation and portfolio diversification in making your suggestions, and assess the risks and returns for each individually, as well as the group of suggestions as a whole. You should also consider how changing market conditions might affect your recommendations and how the recommendations fit with the company’s investment needs and priorities. Running head: MILESTONE 4: EXECUTIVE SUMMARY AND RECOMMENDATIONS Milestone 4: Executive Summary and Recommendations 1 MILESTONE 4: EXECUTIVE SUMMARY AND RECOMMENDATIONS 2 Milestone 4: Executive Summary and Recommendations I. Executive summary The essential changes in a company's corporate strategy require from the analysis of the consequences of such change from multiple points of view. The current paper illustrates the different studies involved in the evaluation of whether or not to expand the company's operations to China. The selected company to demonstrate this analysis is the Walt Disney company, a leading company in the entertainment industry not only at a domestic level but also internationally. As per the company's original mission, Disney devised a company that would bring entertainment and joy to all the children, regardless of their cultural background. Faithful to such a purpose, the executives of the company have prosecuted Disney's dream for approximately a century. While expansion into Europe was a relatively straightforward project considering the cultural similarities between Western European countries and the United States, the development into an entirely different culture as China is a considerably higher challenge. Besides the cultural differences, the company needs to account for the separate legislation existing in the country and the financial constraints imposed by the past crisis. From this point of view, the criteria used in the decision about the expansion into China account for multiple factors. One of such variables is the impact of the cultural heritage on how Chinese may perceive the entertainment activities implemented by the Walt Disney Company. The legal constraints that may somewhat hamper the company management in China represent the second major factor. Lastly, the third factor refers to the impact of both the American and the Chinese economic situation on the company's financial results. MILESTONE 4: EXECUTIVE SUMMARY AND RECOMMENDATIONS 3 V. Recommendations Having analyzed the cultural characteristics of the Chinese society, the current economic situation in both the United States and China, and the financial performance of the company, I would recommend the company managers to expand into the Chinese market despite the different expected challenges resulting from the cultural and legal constraints. The analysis carried out indicates how the company would benefit despite the concerns of some company’s managers (Sampson, 2018), as the company can easily overcome the presented challenges through the careful design of the corporate strategy. Such a recommendation arises from the fact that the company’s financial situation indicates a considerably higher strength than its main competitors (Plunkett et al., 2019; Walt Distney, 2018). Nonetheless, the company seems to be currently losing its competitiveness as the trends observed in the financial results of the past years are worse than those of the industry average as shown in table 1. The expansion into the Chinese market would open a new market niche for the company, resulting in higher sales. Besides, both the American and the Chinese economies seem to be currently under an expansionary phase, in which people will likely spend more money in leisure activities, thus representing a promising situation for companies that, like the Walt Disney company, focus on entertaining the public. Some strategies that will help the company overcome the prospected challenges of such expansion focus on the analysis of the preferences of the Chinese customers as well as finding a Chinese partner that will provide both the legal background required by the Chinese government and support in the construction and management of the different Walt Disney resorts. The proposed strategy seems to be the ideal one considering how it enables the company to continue with its growth strategy through the diversification of both its market and type of MILESTONE 4: EXECUTIVE SUMMARY AND RECOMMENDATIONS 4 products. This diversification is the most appropriate risk mitigation approach, as it ensures that the company can somehow balance the losses of any of its international divisions with the profits of other regions, thus minimizing the dependence of the company’s financial performance on punctual economic problems appearing in the different countries in which the company operates (Hopkin, 2018). Lastly, the proposed strategy aligns with the company's needs and priorities, in the sense that it enables the company to recover its competitive position for the entertainment industry while complying with Walt Disney's dream of bringing entertainment to all the children worldwide (Barboza & Barnes, 2016). MILESTONE 4: EXECUTIVE SUMMARY AND RECOMMENDATIONS 5 References Barboza, D. & Barnes, B. (2016). How China won the keys to Disney’s Magic Kingdom. The New York Times. Retrieved January 23rd, 2019, from https://www.nytimes.com/2016/06/15/business/international/china-disney.html Hopkin, P. (2018). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers. Plunkett, Jack W., Plunkett, M. B., Steinberg, J. S., Faulk, J., & Snider, I. J. (2019). Walt Disney Company (The). Search All. Retrieved February 7, 2019, from http://www.plunkettresearchonline.com. Sampson, H. Disney CEO still bullish on China despite Shanghai park slump. Retrieved January 23rd, 2019, from https://skift.com/2018/11/08/disney-ceo-still-bullish-on-china-despiteshanghai-park-slump/ Walt Disney. (2018). Annual report 2018. Retrieved January 9, 2019, from https://www.thewaltdisneycompany.com/investor-relations/ MILESTONE 4: EXECUTIVE SUMMARY AND RECOMMENDATIONS Annex Table 1. Comparison of the financial results of the Walt Disney company with the industry average (Plunkett et al., 2019) Financial ratio Liquidity Efficiency Profitability Market value ratios Leverage Current Ratio Quick Ratio Inventory Turnover Days Sales in Inventory Receivables Turnover Payables Turnover Days Sales in Receivables Days Sales in Payables Total Asset Turnover Capital Intensity Profit margin Retun on Assets Return on Equity Price-earnings ratio Price-sales ratio Market to book ratio Total Debt Ratio Debt to Equity Ratio Equity Multiplier Times Interest Earned Ratio Walt Disney Company 0.811 0.676 11.389 32.050 6.387 4.788 57.149 76.226 0.576 1.737 0.163 0.094 0.217 16.668 0.003 0.004 0.569 0.545 2.319 27.590 Industry average 2.330 2.000 16.890 51.850 8.100 64.840 75.000 0.430 -0.149 -0.972 0.785 5.620 2.940 - 6 Running head: 1 [Title Here, up to 12 Words, on One to Two Lines] 2 [Title Here, up to 12 Words, on One to Two Lines] The company has focalized its effort on expanding into the international market through the creation of both entertainment park resorts and the merger with local media networks. In this regard, the strategy of the American company has taken Walt Disney to places like Europe, Asia, and Africa in the attempt to accomplish the dream of its founder, Walt Disney, of bringing entertainment to all the children. This ambitious strategy has enabled the company to become the world's largest media company and one of the most respected brands around the globe (Walt Disney, 2018). The present report analyzes the international expansion strategy of the company and evaluates the main challenges and opportunities faced by the company. International market analysis: The case of China The expansion of the Walt Disney Company into the Chinese market had probably been the most complicated to the company as a result of the requirements established by the Chinese government. In this regard, the fact that the Chinese government requires all the foreign companies wishing to operate in China had been one major drawback for the opening of the company's animation resort in Shangai. So was the impossibility of opening its television channel, which had represented a critical factor in the brand construction in the rest of continents. In this case, the Chinese government fiercely opposed the possibility of a foreign company controlling a television channel in the country. Despite these impediments, the company desired to expand into the Chinese market as early as possible. The reason is evident if analyzing both the strength of the Chinese economy and the high population of the country. In this regard, the company expected to make significant revenue from the annual visits of Chinese people into the amusement park, the commercialization of the Disney products (such as clothes, toys, or school stationery), and the subscription to its Disney channel network. After nearly eight years of fierce 3 negotiations between the company's executives and the Chinese government, however, the company finally got the permission to build the country's biggest recreation park in the second most populated of the country, Shanghai (Barboza & Barnes, 2016). However, the company had to back up in most of its demands to be able to convince the Chinese governors of giving the authorization necessary for the construction of the park. In this regard, the company would not have the possibility of leading the Disney television channel, nor would it have the exclusive management of the park, as it should share both its government and a high proportion of the profits with the Chinese government. Was this tremendous effort worth? The figures seem to point towards an affirmative answer even though the company had to lower its price to increase the demand and affluence to the Shanghai amusement park in 2018 (Sampson, 2018). In this regard, the company’s net revenue has increased by approximately 32% over the past six years, as indicated in figure 1. Figure 1. The increase of the Walt Disney Company's revenue in the past years 4 Exchange rate prediction As per the World Bank, the Chinese economy has increased substantially since the country decided to change the communist highly controlled market into a capitalist free market. The transition initiated some 40 years ago, has resulted in the fast economic and social development of the country. In this regard, the country's real gross domestic product increased by approximately 10% annually. Nonetheless, of the rapid growth experienced in the past four decades, the country is still an underdeveloped country compared to western economies such as the American or European economies. In this sense, the high population of the country implies that most of the community has a per capita income that is only a small fraction as compared to employees working on the same or similar industrial sector in the United States (World Bank, 2018). Besides, the rapid economic growth has brought new challenges to the country, which faced a fast urbanization, observed the increase in the gap between the poor and the wealthy citizens in the country, and presented multiple problems as the population migrated from the rural to the urban areas in the nation in their search for better life conditions. These challenges, among others, have motivated the current slowed down in the country's economic growth. In this sense, while the country's economy continues to increase, its pace is no longer the same, with the country's GDP has risen by solely 2.5% annually in the past four years (World Bank, 2018). The American economy, on the other hand, has improved steadily after the financial crisis from 2008. In this regard, the country's gross domestic product increases by 3.5% annually on average. With both the American and the Chinese in an expansionary phase, it is necessary to estimate how the currency exchange rate between the yuan and the dollar is likely to affect American companies operating in the Chinese market such as the Walt Disney Company. In this 5 regard, figure 2 illustrates the trend observed in the USD/yuan currency exchange rate over the past year (Yahoo finance, 2018). As noted in the graph, the USD/Yuan currency exchange rate has increased slightly over the past year, indicating a revalorization of the US dollar as compared to the yuan. Shall this trend continue in the future, the company would perceive a lower value in the Chinese market as the yuan devaluates compared to the US dollar. In this regard, the forecasted USD/Yuan value in one year from now will be of 7.92, as indicated below. Figure 2. The currency exchange rate between the US dollar and the Chinese yuan in the past year 𝑈𝑆𝐷 = 0.0738 ∗ 24 + 6.1527 = 7.92 𝐶𝑌𝑁 Risk management tools analysis The Walt Disney company uses several risk management tools in the study of the risks faced by the company and the definition of the different risk minimization strategies. In this regard, one of the most significant risks faced by the company in the international environment is 6 the fluctuation of its cash flows within the different divisions or units operating in North America, Europe, Africa, and Asia. In this regard, it is noteworthy how the company has focused its risk management strategy at minimizing the impact that interest rates and currency exchange rates had on its cash flow and borrowings through setting a series of liabilities at a fixed rate instead of a variable rate and focusing on core business issues and challenges minimizing the earnings and liability commitments in the different regions in which the company operates (Hopkin, 2018). Other financial risk management tools that have been successfully employed by the company in the control of such oscillations are the entrance into option and forward contracts in the different foreign currencies. Through this approach, the Walt Disney company protects the value of the foreign assets and liabilities, which will thus not oscillate as much as they would should they maintain its value dependent on the variation of the currency exchange rates. Through this strategy, the company manages to support its operations in the foreign locations while minimizing the risks associated to the fluctuations in the currency exchange rate of such areas, as the company does not firmly commit to the foreign currency transactions taking place. The hedging strategy implemented by the Walt Disney company regarding its foreign currency transactions enables the company to leverage the risk over four-year periods, thus representing a minimum exposure in the company's annual reports. Moreover, the fact that the company uses several currencies to apply such hedging strategies (e.g., euro, yen, British pound, and Canadian dollar, among others), enables the company to compensate the cross-currency swaps by leveraging the financial results of the different foreign locations before converting such results into US dollars (Hopkin, 2018). 7 References Barboza, D. & Barnes, B. (2016). How China won the keys to Disney’s Magic Kingdom. The New York Times. Retrieved January 23rd, 2019, from https://www.nytimes.com/2016/06/15/business/international/china-disney.html Hopkin, P. (2018). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers. Sampson, H. Disney CEO still bullish on China despite Shanghai park slump. Retrieved January 23rd, 2019, from https://skift.com/2018/11/08/disney-ceo-still-bullish-on-china-despite-shanghai-park-slu mp/ Walt Disney. (2018). The Walt Disney Company. About us. Retrieved January 23, 2019, from https://www.thewaltdisneycompany.com/about/#global Yahoo Finance. (2018). USD/Yuan currency exchange rate. Retrieved January 23, 2019, from https://finance.yahoo.com/quote/CNY%3DX?p=CNY%3DX 8 Annex. The method used in the forecast of the currency exchange rate Briefly, the technique used for the estimates of the US/yuan currency exchange rate involves the estimation of the linear regression model over the past 12 months and the forecast of the currency exchange rate for the next 12 months. In this regard, the regression model used is: 𝑈𝑆𝐷 = 0.0738 ∗ 𝑥 + 6.1527 𝐶𝑌𝑁 Where x represents the number of months elapsed from the beginning of the analysis (February 1st, 2018). Using such a model, the 12-month forecast, that is, by the end of January 2020, corresponds to an x value of 24 months. The forecasted amount using such model will thus be: 𝑈𝑆𝐷 = 0.0738 ∗ 24 + 6.1527 = 7.92 𝐶𝑌𝑁 Running head: MILESTONE TWO: PROJECTIONS AND WACC Milestone Two: Financial Projection and Calculation of the Weighted Average Cost of Capital The Walt Disney Company 1 MILESTONE TWO: PROJECTIONS AND WACC 2 Milestone Two: Financial Projection and Calculation of the Weighted Average Cost of Capital The Walt Disney Company The present report analyzes the financial projection of the Walt Disney Company on the short term and evaluates the weighted average cost of capital of the company. Specifically, the report focuses on the evaluation of the most significant trends observed in the financial results reported by the company regarding its balance sheet, income statement and cash flow statement. Besides, it evaluates the weighted average cost of capital by analyzing the company's capital structure, cost of debt, and the cost of equity. III. Financial projections Table A.1. shows a summary of the significant trends registered in the past three years regarding the company's financial results. As observed from the data presented in this table, the company's sales revenue has increased by 6.83% between 2016 and 2018 (Walt Disney Company, 2018). The increase in the cost of goods sold and selling, general and administrative expenses during this period were of 9.58% and 1.21%, respectively (Walt Disney Company, 2018). On the other hand, table A.1. highlights how the company’s tax rate has decreased substantially over the past year. In this regard, while the company paid a 34.15% and 32.07% tax in 2016 and 2017, respectively, the tax rate paid on 2018 was of solely 11.29% (Walt Disney Company, 2018). The overall effect of these changes was an increase in the net income of approximately 34% in the past three years (Walt Disney Company, 2018). Taking the above trends into account, the assumptions used in the estimation of the cash flows for the next three years presuming the most likely scenario are: MILESTONE TWO: PROJECTIONS AND WACC • Annual increase in sales = 6.83/2 = 3.42% • Annual increase in cost of goods sold = 9.58/2 = 4.79% • Annual increase in sales, general, and administrative expenses = 1.21/2 = 0.61% • Tax rate = (11.29 + 32.07 + 34.15)/3 = 25.84% 3 On the other hand, the assumptions used in the estimation of the future financial performance of the company in the best-case scenario are: • Annual increase in sales = Maximum increase = 7.79% • Annual increase in the cost of goods sold = Minimum increase = 1.09% • Annual increase in sales, general, and administrative expenses = Minimum increase = -6.60% • Tax rate = Minimum tax rate = 11.29% Lastly, the assumptions used in the estimation of the future financial performance of the company in the worst-case scenario are: • Annual increase in sales = Minimum increase = -0.89% • Annual increase in the cost of goods sold = Maximum increase = 8.40% • Annual increase in sales, general, and administrative expenses = Maximum increase = 8.37% • Tax rate = Maximum tax rate = 34.15% Table A.2. shows the projected income statements taking these figures into account for the future three years assuming a most likely scenario. According to the calculation carried out, the company would be able of raising a net income of $13,621 million in 2019, $13,921 million in 2020, and $14,217 million in 2021 in such a scenario. Table A.3., on the other hand, shows the MILESTONE TWO: PROJECTIONS AND WACC 4 projected income statements taking these figures into account for the future three years assuming a best-case scenario. According to the calculation carried out, the company would be able of raising a net income of $20,238 million in 2019, $24,830 million in 2020, and $29,731 million in 2021 in such a scenario. Lastly, table A.4. shows the projected income statements taking these figures into account for the future three years assuming a worst-case scenario. According to the calculation carried out, the company would be able of raising a net income of $9,177 million in 2019, $6,340 million in 2020, and $3,298 million in 2021 in such a scenario. A. Weight of equity The first element used in the estimation of the company's weighted average cost of capital is the weight of equity, which accounts for the proportion of the market value of equity in the company’s capital structure. By the end of the past accounting year, the company’s stock price was of $113.95 (Yahoo Finance, 2019) and the company had a total of 1,490,000,000, resulting in a market value of equity of $169,785.5 million as seen below. 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 1,490 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 ∗ $113.95 = $169,785.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 On the other hand, the market value of debt considering the sum of the short-term debt and the long-term debt of the company is of $21,194 million, as seen in section B. Consequently, the weight of equity will be of 88.90%, as indicated below: 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐸𝑞𝑢𝑖𝑡𝑦 169,785.5 = = 0.8890 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷𝑒𝑏𝑡 169,785.5 + 21,194 B. Weight of debt The second element used in the estimation of the company’s weighted average cost of capital is the weight of debt, which accounts for the proportion of the company’s market value of MILESTONE TWO: PROJECTIONS AND WACC 5 debt in the company’s capital structure. According to the data provided by the company’s balance sheet, the company had $3,400.0 million current long-term debt in 2017 and $2,785.0 million in 2018, respectively. Besides, it had $19,119.0 million non-current long-term debt and $17,084.0 million in 2018 (Walt Disney Company, 2018). The market value of the company’s debt as of September 30, 2018, was thus of $21,194 million, as seen below: 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡($ 𝑚𝑖𝑙𝑙𝑖𝑜𝑛) = 3400 + 2785 19119 + 17084 + = 3092.5 + 18101.5 2 2 = $21,194 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 Considering how the company’s market value of equity was of $169,785.5 million as calculated in section A, the company’s weight of debt will be of 11.10% as seen below: 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝐷𝑒𝑏𝑡 21,554 = = 0.1110 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷𝑒𝑏𝑡 169,785.5 + 21,194 C. Cost of equity The cost of equity may be estimated by considering the risk-free rate, the beta coefficient of the company’s equity, and the market premium. As per the publicly available data, the riskfree rate, equivalent to the rate of return of a 10-year US treasury bond is of 2.712% (CNBC, 2019). On the other hand, the company’s beta coefficient is of 0.81 (Yahoo Finance, 2019) and assuming a market premium of 6% as the average return of the US stock markets, the company’s cost of equity will be of 7.572%, as seen below: 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑅𝑓𝑟𝑒𝑒 + 𝛽 ∗ 𝑅𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 = 2.712 + 0.81 ∗ 6 = 2.712 + 4.86 = 7.572% MILESTONE TWO: PROJECTIONS AND WACC 6 D. Cost of debt The cost of debt may be estimated considering how the company has paid a total of $682 million interest expenses in 2018 (Walt Disney, 2018) for the total debt of $21,554 million calculated in section B. According to these figures, the cost of debt paid by the company in 2018 was of 3.22%, as seen below. 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 682 ∗ 100 = ∗ 100 = 3.22% 𝐷𝑒𝑏𝑡 21194 E. Tax rate The tax rate paid by the company may be estimated considering how the company has recently paid a total tax of $1,663 million of taxes for a taxable income of $14,729 million in 2018 (Walt Disney, 2018). According to these figures, the tax rate paid by the company in 2018 was of 11.29%, as seen below. 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒 = 𝑇𝑎𝑥 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 1,663 ∗ 100 = ∗ 100 = 11.29% 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 14,729 F. Value of the company’s stock compared to the forecasted value from the projected cash flow The company’s weighted average cost of capital taking the above figures into account is of 7.04%, as seen below: 𝑊𝐴𝐶𝐶 = 𝐾𝑒 ∗ 𝑊𝑒 + 𝐾𝑑 ∗ 𝑊𝑑 ∗ (1 − 𝑇) = 7.572 ∗ 0.8890 + 3.22 ∗ 0.1110 ∗ (1 − 0.1129) = 6.73 + 0.32 = 7.05% MILESTONE TWO: PROJECTIONS AND WACC 7 Taking this weighted average cost of capital into account and assuming the free cash flows forecasted for the Walt Disney company using the most likely scenario, the company’s net present value would be of $49,059,823,788, as seen below. 2 1 1 𝑁𝑃𝑉 = 12,598,000,000 + 13,620,983,070 ∗ + 13,921,420,983 ∗ ( ) 1.0705 1.0705 3 1 + 14,216,577,688 ∗ ( ) = $49,059,823,788 1.0705 Considering that the computed market value of debt in section B is of $21,194 million, the resulting equity for the computed net present value will be of $27,865.8, as seen below: 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑓𝑟𝑒𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑚𝑜𝑑𝑒𝑙) = 49059.8 − 21194.0 = $27,865.8 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 Since the company has a total of 1,490 million shares, this equity corresponds to a price per share of $18.70, as seen below: 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = $27.865.8 = $18.70 1,490 As observed, this price per share is substantially lower than the current stock price (Yahoo Finance, 2019), indicating how the company’s stocks are currently overvalued. MILESTONE TWO: PROJECTIONS AND WACC References Walt Disney. (2018). Annual report 2018. Retrieved January 9, 2019, from https://www.thewaltdisneycompany.com/investor-relations/ Yahoo Finance. (2019). The Walt Disney Company. Retrieved January 9, 2019, from https://finance.yahoo.com/quote/DIS?p=DIS CNBC. (2019). U.S. 10-year treasury. Retrieved January 9, 2019, from https://www.cnbc.com/quotes/?symbol=US10Y 8 MILESTONE TWO: PROJECTIONS AND WACC 9 Annex: Tables Table A.1. Significant trends Income statement Revenue Operating expenses Income from continuing operations Net income Total revenue Cost of revenue Gross profit Reseach and Development Selling General and Administrative Others Total operating expenses Operating income or loss Total other income/expenses net Earnings before interest and taxes Interest expense Income before tax Income tax expense Minority interest Net income from continuing operations Net income Net income applicable to common shares 2018 $ 59,434,000,000 $ 32,726,000,000 $ 26,708,000,000 $ 8,860,000,000 $ 44,597,000,000 $ 14,837,000,000 $ (108,000,000) $ 14,837,000,000 $ (682,000,000) $ 14,729,000,000 $ 1,663,000,000 $ 5,182,000,000 $ 13,066,000,000 $ 12,598,000,000 $ 12,598,000,000 2017 $ 55,137,000,000 $ 30,191,000,000 $ 24,946,000,000 $ 8,176,000,000 $ 41,149,000,000 $ 13,988,000,000 $ (200,000,000) $ 13,988,000,000 $ (507,000,000) $ 13,788,000,000 $ 4,422,000,000 $ 4,837,000,000 $ 9,366,000,000 $ 8,980,000,000 $ 8,980,000,000 2016 Trend (2016-2018) $ 55,632,000,000 6.83% $ 29,864,000,000 9.58% $ 25,768,000,000 3.65% $ 8,754,000,000 1.21% $ 41,145,000,000 8.39% $ 14,487,000,000 2.42% $ 381,000,000 -128.35% $ 14,487,000,000 2.42% $ (354,000,000) 92.66% $ 14,868,000,000 -0.93% $ 5,078,000,000 -67.25% $ 4,058,000,000 27.70% $ 9,790,000,000 33.46% $ 9,391,000,000 34.15% $ 9,391,000,000 34.15% Table A.2. Forecasted performance assuming a most likely scenario Most likely scenario Revenue Operating expenses Income from continuing operations Net income Total revenue Cost of revenue Gross profit Reseach and Development Selling General and Administrative Others Total operating expenses Operating income or loss Total other income/expenses net Earnings before interest and taxes Interest expense Income before tax Tax rate (%) Income tax expense Minority interest Net income from continuing operations Net income Net income applicable to common shares 2018 $ 59,434,000,000 $ 32,726,000,000 $ 26,708,000,000 $ 8,860,000,000 $ 44,597,000,000 $ 14,837,000,000 $ (108,000,000) $ 14,837,000,000 $ (682,000,000) $ 14,729,000,000 $ 1,663,000,000 $ 5,182,000,000 $ 13,066,000,000 $ 12,598,000,000 $ 12,598,000,000 2019 $ 61,466,642,800 $ 34,293,575,400 $ 27,173,067,400 $ 8,914,046,000 $ 43,207,621,400 $ 18,259,021,400 $ (108,000,000) $ 18,259,021,400 $ (682,000,000) $ 18,367,021,400 25.84% $ 4,746,038,330 $ 5,182,000,000 $ 13,620,983,070 $ 13,620,983,070 $ 13,620,983,070 Table A.3. Forecasted performance assuming the best-case scenario 2020 $ 63,568,801,984 $ 35,936,237,662 $ 27,632,564,322 $ 8,968,421,681 $ 44,904,659,342 $ 18,664,142,642 $ (108,000,000) $ 18,664,142,642 $ (682,000,000) $ 18,772,142,642 25.84% $ 4,850,721,659 $ 5,182,000,000 $ 13,921,420,983 $ 13,921,420,983 $ 13,921,420,983 2021 $ 65,742,855,012 $ 37,657,583,446 $ 28,085,271,566 $ 9,023,129,053 $ 46,680,712,499 $ 19,062,142,513 $ (108,000,000) $ 19,062,142,513 $ (682,000,000) $ 19,170,142,513 25.84% $ 4,953,564,825 $ 5,182,000,000 $ 14,216,577,688 $ 14,216,577,688 $ 14,216,577,688 MILESTONE TWO: PROJECTIONS AND WACC 10 Best case scenario Revenue Operating expenses Income from continuing operations Net income Total revenue Cost of revenue Gross profit Reseach and Development Selling General and Administrative Others Total operating expenses Operating income or loss Total other income/expenses net Earnings before interest and taxes Interest expense Income before tax Tax rate (%) Income tax expense Minority interest Net income from continuing operations Net income Net income applicable to common shares 2018 $ 59,434,000,000 $ 32,726,000,000 $ 26,708,000,000 $ 8,860,000,000 $ 44,597,000,000 $ 14,837,000,000 $ (108,000,000) $ 14,837,000,000 $ (682,000,000) $ 14,729,000,000 $ 1,663,000,000 $ 5,182,000,000 $ 13,066,000,000 $ 12,598,000,000 $ 12,598,000,000 2019 $ 64,063,908,600 $ 33,082,713,400 $ 30,981,195,200 $ 8,275,240,000 $ 41,357,953,400 $ 22,705,955,200 $ (108,000,000) $ 22,705,955,200 $ (682,000,000) $ 22,813,955,200 11.29% $ 2,575,695,542 $ 5,182,000,000 $ 20,238,259,658 $ 20,238,259,658 $ 20,238,259,658 2020 $ 69,054,487,080 $ 33,443,314,976 $ 35,611,172,104 $ 7,729,074,160 $ 41,172,389,136 $ 27,882,097,944 $ (108,000,000) $ 27,882,097,944 $ (682,000,000) $ 27,990,097,944 11.29% $ 3,160,082,058 $ 5,182,000,000 $ 24,830,015,886 $ 24,830,015,886 $ 24,830,015,886 2021 $ 74,433,831,623 $ 33,807,847,109 $ 40,625,984,514 $ 7,218,955,265 $ 41,026,802,375 $ 33,407,029,249 $ (108,000,000) $ 33,407,029,249 $ (682,000,000) $ 33,515,029,249 11.29% $ 3,783,846,802 $ 5,182,000,000 $ 29,731,182,447 $ 29,731,182,447 $ 29,731,182,447 Table A.4. Forecasted performance assuming the worst-case scenario Worst case scenario Revenue Operating expenses Income from continuing operations Net income Total revenue Cost of revenue Gross profit Reseach and Development Selling General and Administrative Others Total operating expenses Operating income or loss Total other income/expenses net Earnings before interest and taxes Interest expense Income before tax Tax rate (%) Income tax expense Minority interest Net income from continuing operations Net income Net income applicable to common shares 2018 $ 59,434,000,000 $ 32,726,000,000 $ 26,708,000,000 $ 8,860,000,000 $ 44,597,000,000 $ 14,837,000,000 $ (108,000,000) $ 14,837,000,000 $ (682,000,000) $ 14,729,000,000 $ 1,663,000,000 $ 5,182,000,000 $ 13,066,000,000 $ 12,598,000,000 $ 12,598,000,000 2019 $ 58,905,037,400 $ 35,474,984,000 $ 23,430,053,400 $ 9,601,582,000 $ 45,076,566,000 $ 13,828,471,400 $ (108,000,000) $ 13,828,471,400 $ (682,000,000) $ 13,936,471,400 34.15% $ 4,759,304,983 $ 5,182,000,000 $ 9,177,166,417 $ 9,177,166,417 $ 9,177,166,417 2020 $ 58,380,782,567 $ 38,454,882,656 $ 19,925,899,911 $ 10,405,234,413 $ 48,860,117,069 $ 9,520,665,498 $ (108,000,000) $ 9,520,665,498 $ (682,000,000) $ 9,628,665,498 34.15% $ 3,288,189,267 $ 5,182,000,000 $ 6,340,476,230 $ 6,340,476,230 $ 6,340,476,230 2021 $ 57,861,193,602 $ 41,685,092,799 $ 16,176,100,803 $ 11,276,152,534 $ 52,961,245,333 $ 4,899,948,269 $ (108,000,000) $ 4,899,948,269 $ (682,000,000) $ 5,007,948,269 34.15% $ 1,710,214,334 $ 5,182,000,000 $ 3,297,733,935 $ 3,297,733,935 $ 3,297,733,935 Running head: MILESTONE ONE: CURRENT FINANCIAL STATUS Milestone One: Current Financial Status of The Walt Disney Company 1 MILESTONE ONE: CURRENT FINANCIAL STATUS 2 Milestone One: Current Financial Status of The Walt Disney Company The present report analyzes the current financial status of the Walt Disney Company and evaluates how such financial status has changed in the past three years. Specifically, the report focuses on the evaluation of the liquidity of the company, its efficiency, the profitability, the market value, and the leverage system employed by the company. A. Liquidity As observed from the data presented in table A1, the Walt Disney Company has relatively high liquidity considering how the current ratio is close to one. This value indicates that the company has enough available cash to pay for the most urgent liabilities without needing to transform any long-term or non-current assets into capital. Nonetheless, of the high liquidity, it is noteworthy how the liquidity of the company seems to show a decreasing trend, as the company incurs into higher amounts of debt. In this regard, it is possible to observe both a decrease in the current ratio and the quick ratio and an increase in the financial leverage and the debt to equity ratios. In this sense, the company's current proportion has decreased by 6.48% in the last three years, indicating a decrease in the short-term liquidity of the company. A similar conclusion arises from the evaluation of the trend in the quick acid ratio, which decreased by 7.33% in the last three years, indicating lower long-term liquidity (Yahoo Finance, 2018). Another important conclusion obtained from the analysis of the company’s liquidity is the differences existing with the liquidity of the rest of the companies operating in the film industry. In this regard, table A2 illustrates how despite the high liquidity of the Walt Disney Company is not able of matching that of other companies in the industry, as both the current ratio MILESTONE ONE: CURRENT FINANCIAL STATUS 3 and the quick ratio are substantially lower than the industry average. Such a difference arises from the fact that the company has much higher equity, assets, and debt than the rest of companies operating in the film industry. For instance, the Walt Disney company has total cash of approximately 4 billion dollars and short-term debt of 6.1 billion dollars, while the industry average total cash and short-term debt are of solely 1.6 billion and 620 million dollars, respectively (Plunkett et al., 2018). B. Efficiency As happened in the case of the company's liquidity, the company's efficiency seems to be decreasing, in some cases even considerably, over the past three years. In this regard, financial ratios such as the days in sales, the days in inventory, or the days in payment indicate that the company needs a longer time to recover the amounts resulting from the accounts receivable or to pay the bills to the company's suppliers. Moreover, the sales per employee have decreased over the past three years (Yahoo Finance, 2018). As observed from the data presented in table A1, the days in sales of the Walt Disney company have decreased by 3.62% to current days in sales of 57.32. This value implies that, on average, the company takes 57.32 days collecting the purchases on credit from the customers. T0his value is still lower than the days in payment, indicating that the company can pay the cost of the goods sold by using the cash inflow obtained from the sale. In this regard, the days in payment have decreased by 13.49% in the past three years. The trend showed by the inventory days of supply or days in inventory is noteworthy, as it is the most promising result. In this case, the company reported a decrease in such efficiency ratio, indicating that the company was becoming more efficient in turning its inventory into a valid sale, thus requiring a shorter time (Yahoo Finance, 2018). MILESTONE ONE: CURRENT FINANCIAL STATUS 4 A comparison of the calculated ratios with that of the industry average highlights how the company is generally more efficient than its competitors, as shown in table A2. In this regard, the days in the inventory of the Walt Disney company are substantially shorter than those of the industry average, while the days in sales and payment are comparable to the industry average (Plunkett et al., 2018). C. Profitability The company has shown relatively stable profitability in the past three years, which results from the fact that the company has built a highly loyal customer base that keeps up purchasing the company's products. In this sense, the most appropriate profitability ratios, such as the EBITDA margin, the gross margin, the operating margin, the net margin, or the return on assets, equity, or invested capital have only varied slightly in the last three years, as indicated in table A1. Compared to the industry average, the company generally shows better profitability as indicated from the comparison shown in table A2 for selected profitability ratios. In this regard, the company shows a substantially higher gross margin, operating margin, net margin, return on assets and return on invested capital. This higher profitability as compared to leading competitors explains why the Walt Disney Company is the leader in the film industry (Plunkett et al., 2018). D. Market value The market value of the Walt Disney company has shown an increasing trend, motivated by the increase in the stock price. In this regard, the market capitalization value of the company was of 169,785,500,000 on September 30, 2018, which corresponds to the fiscal year end of the latest annual report presented by the company. Such a market value is substantially higher than MILESTONE ONE: CURRENT FINANCIAL STATUS 5 the market capitalization of the company in the previous years despite the decrease in the number of outstanding shares (Yahoo Finance, 2018). The price to earnings ratio, on the other hand, has decreased substantially over the past year as a result of the increased earnings per share, much higher than the increased share price. In this regard, the fact that the earnings per share increased from $5.73 to $8.36 between 2017 and 2018 resulted in a decrease of the price to earnings ratio of 11.94% in the past three years and of 18.23% in the past year. Nonetheless, the computed price to earnings ratio of 2018 was of 13.63, indicating that the company's stock price is still highly overvalued as compared to the stock market (Yahoo Finance, 2018). E. Leverage The most significant trend observed in the analysis of the leverage ratios of the Walt Disney company is that of the times' interest earned ratio. In this regard, the estimated times' interest earned ratio indicates that the company showed a poorer leverage profile in 2018 as compared to both 2016 and 2017. The decrease in this ratio was of 46.84% in the last three years, is the current times' interest earned ratio of 40.924 (Yahoo Finance, 2018). It is also noteworthy how the other financial ratios representative of the company's leverage had shown a maximum value in 2017, decreasing after that. In this sense, while the total debt ratio, the debt to equity ratio, and the equity multiplier had increased significantly between 2016 and 2017, they decreased between 2017 and 2018. The overall trend over the past three years showed a net decrease ranging between 4.64% for the total debt ratio and 5.49% for the debt to equity ratio between 2016 and 2018 (Yahoo Finance, 2018). MILESTONE ONE: CURRENT FINANCIAL STATUS 6 Lastly, it is noteworthy how the Walt Disney company presents a substantially better leverage profile between its debt and its equity as compared to its main competitors. In this sense, the computed total debt and debt to equity ratios were considerably lower than those reported for the film industry, as shown in table A2 (Plunkett et al., 2018). Conclusions As observed from the analysis carried out, the Walt Disney Company seems to present stronger financial results when compared to the rest of companies operating in the same industry. In this regard, the company does not only have a higher sales volume than its competitors but more efficient use of its financial resources in most of the cases. From this point of view, I expect that the company will remain as the leader in the film sector in the future years, even despite the apparent deterioration of its financial results in the past three years. MILESTONE ONE: CURRENT FINANCIAL STATUS 7 References Plunkett, Jack W., Plunkett, M. B., Steinberg, J. S., Faulk, J., & Snider, I. J. (2018). Walt Disney Company (The). Search All. Retrieved December 25, 2018, from http://www.plunkettresearchonline.com. Yahoo Finance. (2018, December 25). The Walt Disney Company. Retrieved December 26, 2018, from https://finance.yahoo.com/quote/DIS?p=DIS MILESTONE ONE: CURRENT FINANCIAL STATUS 8 Annex: Tables Table A.1. Financial ratios computed for the Walt Disney Company (Yahoo finance, 2018) Financial ratio Current Ratio Quick Ratio Inventory Turnover Days Sales in Inventory Receivables Turnover Payables Turnover Efficiency Days Sales in Receivables Days Sales in Payables Total Asset Turnover Capital Intensity Profit margin Profitability Retun on Assets Return on Equity Price-earnings ratio Market value ratios Price-sales ratio Market to book ratio Total Debt Ratio Debt to Equity Ratio Leverage Equity Multiplier Times Interest Earned Ratio Liquidity 2016 2017 2018 1.007 0.853 11.495 31.753 6.137 4.353 59.475 83.843 0.604 1.654 0.169 0.102 0.217 15.479 0.003 0.003 0.530 0.431 2.127 40.924 0.811 0.676 11.389 32.050 6.387 4.788 57.149 76.226 0.576 1.737 0.163 0.094 0.217 16.668 0.003 0.004 0.569 0.545 2.319 27.590 0.942 0.791 12.094 30.181 6.367 5.032 57.323 72.529 0.603 1.659 0.212 0.128 0.258 13.630 0.003 0.003 0.505 0.407 2.022 21.755 Trend % change 2016 to 2018 -6.48% -7.33% 5.21% -4.95% 3.76% 15.60% -3.62% -13.49% -0.28% 0.28% 25.57% 25.22% 19.00% -11.94% 9.42% 3.70% -4.64% -5.49% -4.97% -46.84% % change 2017 to 2018 16.18% 17.02% 6.19% -5.83% -0.30% 5.10% 0.30% -4.85% 4.72% -4.51% 30.15% 36.29% 18.84% -18.23% 5.18% -3.96% -11.14% -25.26% -12.81% -21.15% Table A.2. Comparison of the financial ratios of the company with the industry average (Yahoo Finance, 2018; Plunkett et al., 2018) Financial ratio Liquidity Efficiency Profitability Market value ratios Leverage Current Ratio Quick Ratio Inventory Turnover Days Sales in Inventory Receivables Turnover Payables Turnover Days Sales in Receivables Days Sales in Payables Total Asset Turnover Capital Intensity Profit margin Retun on Assets Return on Equity Price-earnings ratio Price-sales ratio Market to book ratio Total Debt Ratio Debt to Equity Ratio Equity Multiplier Times Interest Earned Ratio Walt Disney Company 0.811 0.676 11.389 32.050 6.387 4.788 57.149 76.226 0.576 1.737 0.163 0.094 0.217 16.668 0.003 0.004 0.569 0.545 2.319 27.590 Industry average 2.330 2.000 16.890 51.850 8.100 64.840 75.000 0.430 -0.149 -0.972 0.785 5.620 2.940 -
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