DISNEY CAPITAL BUDGET

IntroductionThe Walt Disney co : Disney(NYSE) Headquarter: Walt Disney studio, Burbank (California , United States) Founded : October 16, 1923. Founder: Walt and Roy disney. Operations: theatre, radio, music, publishing and online media Best known: film studio ##14 theme park around the world

Net Income(In Thousands):4,807,000 -2011 3,963,000 -2010 3,307,000 -2009 ##Walt Disney Co. (DIS)- 49.60 0.04(0.08%)

Plans Built near Rio, in Orlando. The Magic Kingdom construct immediately

and operational at the beginning of the second year. (or) Epcot Center at Orlando to be constructed in the second and third year and becoming operational at the beginning of the fourth year The earnings and cash flows are estimated in nominal U.S. Dollars.

ASSUMPTIONS OF STARTUP COSTCost: Magic Kingdom will be $3 billion-$ 2 billion right now -$1 Billion next year. -$0.5 Billion license and researching(spent). Epcot II will be $ 1.5 billion -$ 1 billion second year end. - $0.5 billion third year end.

Key Expense AssumptionsThe operating expenses: 60% of the revenues at the parks 75% of revenues at the resort properties. General and administrative costs: Allocation will be 15% of the revenues each year. (on total revenue) one-third are variable. two-thirds are fixed.

Analyzing Disneys Current Debt. Disney has $16 billion in debt with a facevalue weighted average maturity of 5.38 years. Allowing for the fact that the maturity of debt is higher than the duration about 10% is Yen.,20% in Euros ,5% in Chinese Yuan,rest in U.S Dollar. Disney has no convertible debt and about 24% of its debt is floating rate debt (given its status as a mature company) Can be increase the floating rate portion of the debt to about 40%.

Key rev assumptions

calcCurrent Cost of Capital:Equity: Cost of Equity = Risk free rate + Beta * Risk Premium = 3.5% + 0.9011 (6%) = 8.91% Market Value of Equity = $45.193 Billion Equity/ (Debt + Equity ) =73.04% Debt: After-tax Cost of debt =(Risk free rate + Default Spread) (1-t) = (3.5%+2.5%) (1-.38) =3.72% Market Value of Debt =$ 16.682 Billion Debt/(Debt +Equity) = 26.96% Cost of Capital = 8.91%(.7304)+3.72%(.2696) = 7.51%

Calc 2Optimal debt level : 40%, Disney would get a rating of A. If insisted on a AA rating, the optimal debt ratio for Disney

is then 30%. Cost of AA Rating Constraint = Value at 40% Debt Value at 30% Debt = $63,651 $63,596 = $55 million If insisted on a AAA rating, the optimal debt ratio for Disney is then 20% Cost of AAA rating constraint =Value at 40% Debt Value at 20% Debt = $63,651 - $62,371

Recommendations for Disney The debt issued should be long term and should have

duration of about 5 Years since a significant portion of the debt should be floating rate debt. Disneys capacity to pass inflation through to its customers and the fact that operating income tends to increase as interest rates go up. Given Disneys sensitivity to a stronger dollar, a portion of the debt should be in foreign currencies. The specific currency used and the magnitude of the foreign currency debt should reflect where Disney makes its revenues.

CONT Based upon 2008 numbers at least, this would indicate

that about 20% of the debt should be in Euros and about 10% of the debt in Japanese Yen reflecting Disneys larger exposures in Europe and Asia. As its broadcasting businesses expand into Latin America, it may want to consider using either Mexican Peso or Brazilian Real debt as well.

Cont.. It can swap some of its existing fixed rate, dollar debt for

floating rate, foreign currency debt. Given Disneys standing in financial markets and its large market capitalization, this should not be difficult to do.??? If Disney is planning new debt issues, either to get to a higher debt ratio or to fund new investments, it can use primarily floating rate, foreign currency debt to fund these new investments. Although it may be mismatching the funding on these investments, its debt matching will become better at the company level.

CONCLUSION

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