Euro Disneyland Case Study
1. INTRODUCTION: The primary objective of this case analysis is to evaluate the proposed Euro Disneyland (EDL) project by applying Capital Budgeting techniques such as Net Present Value, analyze financial and economic risks, measure exposures of Euro Disneyland (EDL) such as economic exposure, transaction exposure and translation exposure, and develop strategies to mitigate these exposures. The case findings reveal that Disney should invest in Euro Disneyland taking into account the benefits arising out of French government subsidies and … 2. BACKGROUND: In 1984, Disney management decided to develop a European theme park On March 24, 1987, the Walt Disney Company entered into the “Master Agreement” with the Republic of France to create and operate Euro Disneyland in France. This was followed by formation of Euro Disneyland SCA and the conclusion of an agreement with the SNCF (the French national railway company) to provide TGV (the French high-speed train) service to Euro Disneyland beginning in June 1994. The total cost of the project was expected to be $2.5 billion based on exchange rate of FF6=$1. The Disney’s risk appears to be modest. Total investment of Disney is $350 million in planning the park. Disney will invest $145 million (49% 0f total equity) and public investors will invest $ 1 billion (51% of the total equity) into shares of Euro Disneyland SCA. Despite a minority shareholder, Disney can still control management. When stocks start trading on Paris Bourse, Disney stake will be valued at $1 billion which is an increase of $855 million in value. Disney has rights to buy 4800 acres of land at the rate of 7500 per acre as compared to $750000 per acre. Disney will collect $35 million royalties on sales of food, admission tickets and souvenirs. The inducements from French Government to Disney include a loan of FF 4.8 billion at an interest rate of 7.85% in contrast to normal commercial rate of 9.25 and an accelerated depreciation to write of construction cost in 10 years. The operating losses during construction are offset by accelerated depreciation benefits such as tax shelters. These benefits will be sold to a French government for $200 million. The French government will invest $ 350 million. EDL will also require about $115 million in working capital which is also expected to grow at the rate of sales revenue. 3. CASE ANALYSIS:
3.1.1 Projected revenues: The projected revenues for the year 1992- 1996 are calculated. The critical variable for driving revenue is the attendance. The range of EDL attendance range is shown in Exhibit----- and is based on conservative 3% annual growth rate in visitor-days.The revenue was calculated by taking average of visitor days and multiplying it by total expenses per visitor. The total expense per visitor included expenditure on merchandise, food and beverages, parking and admission tickets. Disney will also collect 10% of the revenues generated by ticket sales and 5% of all expenditures on merchandise, food and beverages. This is subtracted from total revenue per visitor. However, participation fees of Kodak and Renault, approximately $ 35 million was added to total revenues. The total revenues were end projected according to low attendance, average attendance and high attendance. (EXHIBIT…….) The total revenue projections from year 1992 to 1996 with average attendance are estimated to be FF 4072.34 to FF5383.62. The total revenue projections with low attendance is estimated to be FF 3318.21 million to FF 4391. 90million.The total revenue projections with high attendance is estimated to be FF 4826.48 million to FF 6375.34 million.
3.1.2 Projected Income Statements: According to case the operating margin is 35%. We can calculate the operating income from this. Operating Margin = Total revenues/ Total Operating income.Disney will also collect management fees according to operating cash flows. See Exhibit …… The total interest...
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