Bus 411 Assignment 5 Due March 19 at the beginning of class (12:30 PM) ASSURANCE OF LEARNING EXERCISE 8C: PERFORM AN EPS/EBIT ANALYSIS FOR WALT DISNEY PURPOSE: An EPS/EBIT analysis is one of the most widely used techniques for determining the extent that debt and/or stock should be used to finance strategies to be implemented. This exercise can give you practice performing EPS/EBIT analysis. INSTRUCTIONS: Let’s say Walt Disney needs to raise $1.2 billion to build a new theme park in Africa. Determine whether Disney should have used all debt, all stock, or a 90-10% (and 10-90%) combination of debt and stock to finance this market-development strategy. Assume a 29% tax rate, 5% interest rate, Walt Disney stock price of per share, and an annual dividend of $0.40 per share of common stock. The EBIT range for 2012 is between $6 billion and $9 billion. A total of 1.9 billion shares of common stock are outstanding. Develop an EPS/EBIT chart to reflect your analysis. Stock price should be from 2011.

Common Stock Financing EBIT Interest

Recession 5,301,600,000.00

Normal 6,627,000,000.00

Boom 7,952,400,000.00

Normal 6,627,000,000.00

Boom 7,952,400,000.00

EBT Taxes EAT # Shares EPS Debt Financing EBIT Interest EBT Taxes EAT # Shares

Recession 5,301,600,000.00

EPS 90% Stock – 10% Debt Financing EBIT Interest EBT Taxes EAT # Shares EPS

Recession 5,301,600,000.00

Normal 6,627,000,000.00

Boom 7,952,400,000.00

Normal 6,627,000,000.00

Boom 7,952,400,000.00

90% Debt – 10% Stock EBIT Interest EBT Taxes EAT # Shares EPS

Recession 5,301,600,000.00

ASSURANCE OF LEARNING EXERCISE 8D: PREPARE PROJECTED FINANCIAL STATEMENTS FOR WALT DISNEY PURPOSE: This exercise is designed to give you experience preparing projected financial statements. Pro forma analysis is a central strategy-implementation technique because it allows managers to anticipate and evaluate the expected results of various strategy-implementation approaches. INSTRUCTIONS: 1. Develop a 2012 projected income statement and balance sheet for Disney. Assume that Disney plans to raise $900 million in 2012 to build a new theme park in Africa and plans to obtain 50 percent financing from a bank and 50 percent financing from a stock issuance. Make other assumptions as needed, and state them clearly in written form. 2. Compute Disney’s current ratio, debt-to-equity ratio, and return on investment for 2012. How do your 2012 ratios compare to the 2010 and 2011 ratios? Why is it important to make this comparison?

Disney’s Projected Income Statement Projected Income Statement (in millions)

2010

2011

Revenues

38,063

40,893

Costs and expenses Restructuring and impairment charges Other income (expense) Net interest expense Equity in the income of investees Income before income taxes Income taxes Net income Less: Net income attributable to noncontrolling interests

(31,337) (270) 140 (409) 440 6,627 (2,314) 4,313

(33,112) (55) 75 (343) 585 8,043 (2,785) 5,258

(350)

(451)

Net income attributable to The Walt Disney Company (Disney) 3,963 Less Dividends (669) Retained Earnings 3,294 Earnings per share attributable to Disney:

4,807 (759) 4,048

Diluted Basic Weighted average number of common shares outstanding: Diluted Basic

2.03 2.07

2.52 2.56

1948 1915

1,948 1,915

2012

Disney’s Projected Balance Sheet Projected Balance Sheet (in millions)

2010

2011

ASSETS Curent assets Cash and cash equivalents Receivables Inventories Television costs Deferred income taxes Other current assets Total current assets

2,722 5,784 1,422 678 1,018 581 12,225

3,185 6,182 1,595 674 1,487 634 13,757

Film and television costs Investments Parks, resorts, and other property, at cost Attractions, buildings, and equipment Accumulated depreciation

4,773 2,513

4,357 2,435

32,875 (18,373) 14,502

35,515 (19,572) 15,593

2012

Projects in progress Land Intangible assets, net Goodwill Other assets

2,180 1,124 5,081 24,100 2,708

2,635 1,127 5,121 24,145 2,614

Total Assets LIABILITIES AND EQUITY Current liabilities Accounts payable and other accrued liabilities Current portion of borrowings Unearned royalties and other advances Total current liabilities

69,206

72,124

6,109 2,350 2,541 11,000

6,362 3,055 2,671 12,088

Borrowings Deferred income taxes Other long-term liabilities

10,130 2,630 6,104

10,922 2,866 6,795

Equity Preferred stock, $0.1 par value Authorized--100 million shares, Issued--none Common stock, $0.1 par value Authorized--4.6 billion shares at October 2,2010 Issued--2.7 billion shares at October 2, 2010

28,736

30,736

Retained earnings

34,327

38,875

Accumulated other comprehensive loss

(1,881)

(2,630)

61,182

66,041

and 803.1 million shares at October 2, 2010

(23,663)

(28,656)

Total Disney Shareholder's equity

37,519

37,385

Non-controlling interests

1,823

2,068

Total Equity

39,342

39,453

Total liabilities and equity

69,206

72,124

Treasury stock, at cost, 937.8 million shares at October 1, 2011

Disney’s Projected Ratios vs. 2011 2011 Current Ratio

1.14

Quick Ratio

1.01

Debt to Equity

0.87

Total Asset Turnover

0.57

2012

Better, Worse or about the same?

ASSURANCE OF LEARNING EXERCISE 8E: DETERMINE THE CASH VALUE OF DISNEY PURPOSE: It is simply good business practice to periodically determine the financial worth or cash value of your company. This exercise gives you practice determining the total worth of a company using several methods. Use year-end 2011 data as given in DIS Annual Report or 10K SEC filing. INSTRUCTIONS: 1. Calculate the financial worth of Disney based on four methods: 1) the net worth or stockholders’ equity, 2) the future value of Disney earnings, 3) the price-earnings ratio, and 4) the outstanding shares method. In a dollar amount, how much is Disney worth?

Disney Company Worth Analysis (in millions) Shareholder’s Equity – Goodwill – Intangibles Net Income X 5 (Stock Price/EPS) X NI # of Shares Out X Stock Price Four Method Average $ Goodwill/ $ Total Assets