Disney
The Walt Disney Company’s Yen Financing
2012/6/3
Case Study in COMM 328
Q1. Yes, Walt Disney Company should hedge its yen royalty cash flow for the following reasons: JPY royalties grows fast: The Walt Disney Company has been receiving yen royalties for several revenues generated by Tokyo Disneyland. During the fiscal year 1984, yen royalty receipts had been just over 8 billion yen and this figure is expected to increase 10% to 20% yearly over the next few years. Given that the expenses incurred by the company would be paid in dollars, Walt Disney Company would not be able to escape from the foreign exchange risk that it might face. Yen/Dollar rate fluctuation: The current spot rate of 248 yen/dollar represented almost 8% depreciation in the value of the yen from 229.70 just over a year ago. But it has appreciated in the quarter since then. From Chart 1 and Chart 2, we can see that the U.S. inflation has exceeded Japanese inflation for the past 5 years, which indicates the future depreciation of dollar against Yen. Furthermore, the forward rate (Exhibit 5) also indicates the same depreciation of dollar. Given the recent depreciation of the yen against the dollar, it is increasingly difficult to forecast the future value of the yen. Considering the long term trend, maybe it does not need to concern the depreciation of the JPY, but if the appreciation of JPY is lower than expectation will also hurt Disney’s plan. Therefore, it can’t be more precise to arrange comprehensively. How much should be hedged and over what time frame Disney Company receives Yen royalties of 8 billion with expected yearly growth rate of 10%-20% and has its large expenses in dollars. It needs the hedge of currency risk at least 8 billion. Although from Exhibit 3, it is shown that Disney Company has some yen term loan. Through calculation, the yen term loan which will be due of 2/1/93 has 12.5 billion yen outstanding and 765 million semiannual yen (1.53 billion annual yen)
2012/6/3
Case Study in COMM 328
Q1. Yes, Walt Disney Company should hedge its yen royalty cash flow for the following reasons: JPY royalties grows fast: The Walt Disney Company has been receiving yen royalties for several revenues generated by Tokyo Disneyland. During the fiscal year 1984, yen royalty receipts had been just over 8 billion yen and this figure is expected to increase 10% to 20% yearly over the next few years. Given that the expenses incurred by the company would be paid in dollars, Walt Disney Company would not be able to escape from the foreign exchange risk that it might face. Yen/Dollar rate fluctuation: The current spot rate of 248 yen/dollar represented almost 8% depreciation in the value of the yen from 229.70 just over a year ago. But it has appreciated in the quarter since then. From Chart 1 and Chart 2, we can see that the U.S. inflation has exceeded Japanese inflation for the past 5 years, which indicates the future depreciation of dollar against Yen. Furthermore, the forward rate (Exhibit 5) also indicates the same depreciation of dollar. Given the recent depreciation of the yen against the dollar, it is increasingly difficult to forecast the future value of the yen. Considering the long term trend, maybe it does not need to concern the depreciation of the JPY, but if the appreciation of JPY is lower than expectation will also hurt Disney’s plan. Therefore, it can’t be more precise to arrange comprehensively. How much should be hedged and over what time frame Disney Company receives Yen royalties of 8 billion with expected yearly growth rate of 10%-20% and has its large expenses in dollars. It needs the hedge of currency risk at least 8 billion. Although from Exhibit 3, it is shown that Disney Company has some yen term loan. Through calculation, the yen term loan which will be due of 2/1/93 has 12.5 billion yen outstanding and 765 million semiannual yen (1.53 billion annual yen)