Disney

CG6175 Final Project Draft

4/10/2010

Group 3:

Glenny Santos

Jose Gautreau

Ricardo Smart

Rafael Rivas

Mary Dalia Santana

Catherine Wood

Table of Contents

  1. Strategy
  1. Assessment of SWOT……………………………………………………        3
  2. Corporate Culture………………………………………………..                
  1. Accounting Analysis
  1. Key Accounting Policies………………………………………………………………….….        4
  1. Financial Analysis – Multiyear Analysis/Comparisons
  1. ROE Decomposition……………………………………………………..        12
  2. Major Competitors…………………………………………………………        13
  3. Industry Averages…………………………………………………………..        22
  1. Forecasting
  1. Assumptions………………………………………………………………..        24
  2. 5 Year Time Horizon……………………………………………….……….        25
  1. Valuation
  1. WACC…………………………………………………………………..        25
  2. DCF……………………………………………………………………………        26
  3. DAE  DAROE…………………………….…….…………….        
  4. Sustainable Earnings……………………………………..……….        
  5. Range of Assumptions…………………………………………………….        27
  6. Bond Rating………………………………………………………………….        30
  1. Conclusions

Endnotes…………………………………………………………………………                31

Annexes…………………………………………………….………………….                32

Strategy

Assessment of SWOT

Our SWOT analysis for the Walt Disney Company is based on McGraw-Hill Companies outline model which defined several factors as key points when looking to size up a company’s strengths, weaknesses, opportunities, and threats. The Walt Disney Company SWOT Analysis examines the company’s key business structure and operations, history and products, and provides summary analysis of its key revenue lines and strategy.

Disney has maintained a substantial growth rate in various financial areas given the many ups and downs of the economy. Despite any impending economic factors, Disney’s revenue has steadily increased over the past years.  Disney’s revenues are comprised of four major segments that bring in their income, which include: media networks, parks and resorts, studio entertainment, and consumer products.  

The Walt Disney Company, together with its subsidiaries, is a diversified entertainment company. The company primarily operates in the US and Canada. It is headquartered in Burbank, California and employs about 150,000 people. The company recorded revenues of $37,843 million during the financial year (FY) ended September 2008, an increase of 6.6% over FY2007. The operating profit of the company was $7,345 million during FY2008, a decrease of 6.2% compared to FY2007. The net profit was $4,427 million in FY2008, a decrease of 5.5% compared to FY2007.

Corporate Culture

Walt Disney Company Culture: MAGIC, IMAGINATION & WONDER

Values Make Our Brands Stand Out

Accounting Analysis

Key Accounting Policies

There are no significant or relevant key accounting policies to point out, other than two which suffered some changes as a result of accounting changes in the matter they relate to, this are: Employee Compensation – Retirement Benefits and Income Tax which will be further detailed in the following section.

Asses Accounting Flexibility

Our focus of analysis in this step will be on those policy choices that can have significant impact on the reported performance of the firm and thus offer an opportunity for the firm to manage the reported numbers.

For example, Depreciation: Parks, resorts and other property are carried at historical cost. Depreciation is computed not by accelerated but on the straight-line method over estimated useful lives as follows:

Attractions:                                                         25-40 years

Buildings and improvements                                 20-40 years

Leasehold improvements                                        Life of lease/asset life if less

Land improvements                                                20-40 years

Furniture, fixtures and equipment                                 3-25 years

The fact that this policy does not point out different options where to choose from this leads us to determine Managers don’t have any kind of flexibility on determining how depreciation must be applied.

Inventories

Inventory primarily includes vacation timeshare units, merchandise, materials, and supplies. Carrying amounts of vacation ownership units are carried at the lower of cost or net realizable value. Carrying amounts of merchandise, materials, and supplies inventories are generally determined on a moving average cost basis and are stated at the lower of cost or market.

The fact that this policy talks about a generality of how inventories are accounted; this leads us to determine managers do have some flexibility on how to report inventory numbers.

The following table shows the grade of flexibility Managers have regarding each Accounting Policy according to our analysis.

With these results we conclude managers in the Company have little or no flexibility on their choices to manage policies already established.

Evaluate Accounting Strategy

a) Has the firm changed any of its policies or estimates?

The Company changes its method of accounting for uncertainty in income taxes in 2008 and its method of accounting for pension and other postretirement benefit plans in 2007 and 2009.

Employee Compensation – Retirement Benefits

In September 2006, the FASB issued guidance that requires recognition of the overfunded or underfunded status of defined benefit pension and other postretirement plans as an asset or liability in the statement of financial position and changes in that funded status to be recognized in comprehensive income in the year in which the changes occur. The guidance on retirement benefits also requires measurement of the funded status of a plan as of the end of the fiscal year. The Company adopted the recognition provision in fiscal year 2007 which resulted in a $261 million charge to accumulate other comprehensive income. The Company adopted the measurement date provision by re-measuring plan assets and benefit obligations at the beginning of fiscal 2009. Adoption of the measurement date provisions resulted in a reduction of $35 million to retained earnings and a $100 million benefit to accumulate other comprehensive income.

Key assumptions used for the measurement of pension and postretirement medical plans at the beginning of fiscal 2009 were 7.80% for the discount rate, 7.50% for the rate of return on plan assets, and 5.00% for salary increases. Based on this measurement of plan assets and benefit obligations, pension and postretirement medical costs decreased to approximately $214 million for fiscal 2009 compared to $255 million for fiscal 2008. The decrease in pension and postretirement medical expense was primarily due to an increase in the discount rate used to measure the present value of plan obligations.

The Company remeasured plan assets and benefit obligations at October 3, 2009 in accordance with new guidance on accounting for retirement plans. Key assumptions for the measurement at October 3, 2009 were 5.75% for the discount rate, 7.75% for the rate of return on plan assets, and 4.50% for salary increases. Based on the measurement at October 3, 2009, the Company recorded an increase in unrecognized pension and postretirement medical expense, which totals $2.8 billion ($1.8 billion after-tax) as of October 3, 2009.

Income Tax

In July 2006, the FASB issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company adopted the guidance on income taxes at the beginning of fiscal year 2008. Applying the guidance on income taxes to all tax positions upon adoption resulted in reductions of $148 million and $15 million to opening retained earnings and minority interests, respectively.

b) Have the company’s policies and estimates been realistic in the past?

Policies and estimates results have been consistent over the years and quarter periods. There has been no evidence of manipulating quarterly reports that forces them to make large fourth-quarter adjustments.

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Evaluate the Quality of Disclosure

a) Does the company provide adequate disclosures to assess the firm’s business strategy and its economic consequences?

The company uses the Letter to Shareholders in their annual report to clearly layout the firm’s industry conditions, its competitive position, and management’s plans for the future. In the latest letter to shareholders, the Company points out their success throughout the year in the production of two animated films, the announcement of China’s go-ahead to build a new theme park in Shanghai and the acquisition of Marvel entertainment. At the same time it points out how ...

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