Walt Disney Financing

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Case study in Derivatives

The Walt Disney Company’s Yen Financing

GROUP SIX Liang Zhang Xiao Cao Xiang Wang Le Lu
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Contents & Structure
Part I. Overview -----------------------------------------------------------------------------------------3 Part II. The problem facing Disney ----------------------------------------------------------------- 3 Status quo 1 - JPY royalties grows fast -------------------------------------------------- 3 Status quo 2 – JPY/USD rate fluctuation -------------------------------------------------3 Problem Summary --------------------------------------------------------------------------- 4 Part III. Various ways of hedging the exposure-------------------------------------------------- 5 Unsatisfied ways of Hedging ---------------------------------------------------------------5 Two Viable Alternatives --------------------------------------------------------------------- 5 (IRR analysis – compare the cost of each alternative)

Alternative 1 --- JPY Term Loan --------------------------------------------------5 Alternative 2 --- ECU Eurobond + ECU/YEN SWAP--------------------------- 6 ECU Eurobond ---------------------------------------------------------- 6 ECU/YEN SWAP -------------------------------------------------------- 7

Part IV. Conclusion ------------------------------------------------------------------------------------- 9

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Harvard Business School

The Walt Disney Company’s Yen Financing

Part I. Overview
- the Walt Disney Company The Walt Disney Company, a diversified international company headquartered in Burbank, California, operated entertainment and recreational complexes, produced motion picture and television features, developed community real estate projects, and sold consumer products. The company was founded in 1938 as successor to the animated motion picture business established by Walt and Roy Disney in 1923. The company operated the Disneyland amusement theme park in Anaheim, California, and the Walt Disney World destination resort in Orlando, Florida. In addition to the domestic entertainment and recreation revenues from Disneyland and Walt Disney World, the company received royalties, paid in yen, on certain revenues generated by Tokyo Disneyland. Owned and operated by an unrelated Japanese corporation, Tokyo Disneyland was opened to the public on April 15, 1983. Consolidated revenues for The Walt Disney Company and its subsidiaries increased by almost 27% in 1984 to $1.7 billion. Total entertainment and recreation revenues, including royalties from Tokyo Disneyland, increased 6% to $1.1 billion in the fiscal year ended September 30,1984. Net income totaled $97.8 million in 1984, an increase of 5% from 1983. Total assets grew 15% to $2.7 billion at the end of fiscal 1984.1

Part II. The problem facing Disney
- The possible exposure of Disney to future fluctuations in the yen/dollar spot rate Status quo 1 - JPY royalties grows fast. The JPY royalties from Tokyo Disneyland had increased significantly2 during the last year, and Disney foresaw further growth (10%-20%) in the years ahead. Status quo 2 – JPY/USD rate fluctuation The current spot rate of 248 yen/dollar represented almost an 8% depreciation in the value of the yen from 229.70 just over a year ago. 1 2

Excerpted from the “Walt Disney Company’s Yen Financing” case, the Walt Disney company. The receipts has just over ¥8 billion 3 / 10

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But it has appreciated in the quarter since then. From the chart below, 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. Further more, the forward rate (Exhibit 5) also indicates the same depreciation of dollar. Figure 1:

Historical Summary of Average Yen/Dollar Exchange Rates and Price Indexes 275 250 225 200 175 150 125...
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