THE WALT DISNEY COMPANY'S YEN FINANCING
Walt Disney, an American leisure and entertainment company, receives royalty payment from Tokyo Disneyland every year. The royalties were denominated in yen and were constantly growing and becoming significant for the company (8 billion Yen in 1984, with 10-20% projected growth). However, the depreciation of the yen against the dollar could incur the risk of devaluation on the royalties to be received, indicating that Walt Disney should perform hedging.
Different solutions are available. First is to (1) buy options to sell yens for dollars or to buy dollars with yen. However this option existed only for maturities of two years or less, which is much less than the time scale of 10 years that Walt Disney was considering. Same issue also applies for the second solution, (2) the future contracts which would allow the company to exchange yen for dollar at a pre-defined rate. Also this issue would still persist if Walt Disney would like to (3) convert its existing dollar debt into yen liability since its Eurodollar note issues matured in one to four years and an attractive rate is hard to find. Moreover this option does not provide any additional cash. The fourth option of (4) FX forward contracts from the bank which could provide long-dated FX forward rate would limit the company's future credit capacity since the bank would consider these contracts as a part of their total exposure. (5) The Eurodollar debt has long maturity as well, but the company's current debt ratio is already too high, and the (6) Euroyen bonds are not possible for this case due to restriction in the form of regulation from Japanese government.
There are two available options for Walt Disney, (7) creating a yen liability through loan from a Japanese bank, or (8) an ECU/yen swap proposed by Goldman Sachs. After calculating the IRR of each option, we came to the conclusion that the swap has a lower IRR; therefore Walt Disney should go for this option.
WALT DISNEY AND ITS PROBLEMS
Walt Disney was founded in 1938 as successor to the Walt and Roy Disney Company. Headquartered in Burbank, California Walt Disney had a wide range of activities including theme parks (Disneyland, Walt Disney World), motion pictures, television programs and The Disney Channel, but also some peripheral activities including developing resort and home communities, commercial and industrial properties, as well as educational material and teaching aids. The company also licensed its name to various consumer products companies.
Consolidated revenues of Disney increased by 27% in 1984, total entertainment and recreation revenues increased by 6%, while film entertainment revenues increased by 48%. In total net income grew by 5%, total assets great by 15%, but the ratio of debt to equity grew significantly as well.
In 1983, Tokyo Disneyland was opened, run by an unrelated Japanese company, paying royalties to Walt Disney Productions. By 1984 the royalties had increased significantly to JPY 8 billion. The royalties were denominated in yen and the director of finance at business, Rolf Anderson, expected these royalties to grow by another 10-20% for the coming years. However the depreciation of the yen against the dollar could incur high risks for Walt Disney, which should be hedged. In exhibit 4 of the case it can be seen how the yen/dollar rate has increased from 225.7 to 250.8 from 1980 till mid-1985. In the following sections we are providing an analysis of possible solutions for hedging the risks stemming from the fluctuation of the yen against the dollar.
POSSIBLE OPTIONS AVAILABLE WITH DISNEY TO HEDGE THE FOREIGN EXCHANGE RISK:
If we take the exchange rate of 1984 i.e. 237.30 JPY/USD (see Case, p8) the revenue of Disney (8 billion yen) was equal to approximately 33.7 million USD. This...
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