Tokyo Disneyland was opened to the public on April 15, 1983. This amusement park was owned and operated by an unrelated Japanese corporation. The Walt Disney Company received royalties, paid in Yen, on certain revenues generated by Tokyo Disneyland. This new overseas business venture was bringing some concern about the foreign exchange risk to Disney. The management team at the Disney has been considering hedging future Yen inflows from Disney Tokyo since 1985. Mr. Anderson, the director of finance at The Walt Disney Company, focused his attention on a possible 15 billion ten-year term loan with an interest rate of 7.5% paid semiannually. On the other hand, Goldman Sachs, who had been working with Disney on this problem, presents a rather unusual but potentially attractive solution: Disney could issue ECU Eurobonds and swap into a Yen liability. Goldman Sachs suggested them to create a Yen liability by swapping 10-year ECU Eurobonds with a sinking fund, the all-in costs of which were denominated in Yen.
As financial consultants, we have been asked by Walt Disney’s management to provide an evaluation of this alternative to the company for this financing decision. For this estimate, we have reviewed the data of the Consolidated Income Statements from 1982 to 1983, the Consolidated Balance Sheets of 1984 and 1983, the Historical Summary of Average Yen/Dollar Exchange Rates and Price Indexes, ECU/Yen Swap flows in the following ten years, Yen Long-dated foreign exchange forward, Cash flow of 10-year ECU Euro bonds with sinking fund (Exhibit 6), and also the list of the French Utility’s outstanding publicly Traded Eurobonds.
We employed the internal rate of return analysis to evaluate the each alternative. If taking the Goldman’s swap solution, Disney’s borrowing cost would be 7.004% in Yen (9.979% in dollar). If adopting the 10-year term loan, the total effective cost would be 7.748% in Yen (10.694% in dollar). Furthermore, by these data we also determined the total expected future revenue under different assumption of the growth rate and found it could cover all the future interest expense in the following ten years
We recommend the management of Walt Disney to ACCEPT the Goldman’s Solution to create10-year ECU Euro bonds with sinking fund and swap with the French utility since this indirect Yen financing has smaller XIRR that means it would be lower borrowing cost than a similar 10 year Yen term loan. We need to point here although all the current data seems quite good and supports adopting this solution, we cannot guarantee the profit and the Walt Disney’s management has to proceed with caution. Because the long length of the project would involve in a plenty of uncertainties of the international exchange market (such as inflation rate fluctuation and economic cycles) Moreover, the market reception of the ECU Eurobond issued by Disney should be taken into consideration, because Disney would be only the second U.S. corporation to access this market. These facts have to be reviewed carefully before making a final decision. The Problem
Walt Disney is a diversified worldwide entertainment company headquartered in Burbank, California. It was established in 1938 to engage in the motion picture business. After several years of expansion, it has operations in four business segments: entertainment and recreation, filmed entertainment, community development, and consumer product.
As the Disney’s business is expanding, the revenue and net income were steadily growing up year by year. The consolidated income statement (Exhibit 1) shows the consolidated revenue for the company and its subsidiaries increased by almost 27% in 1984 to $1.7 billion. The total entertainment and recreation revenues, including royalties from Tokyo Disneyland, increased 6% to $1.1 billion at the end of 1984. Filmed entertainment income increased 48%...
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