Walt Disney Company\'s Yen Financing case analysis

2. Team
10
Steven Lambe Fred Patet Petr Khalfen
Yunyun Xu Ashmita Srivastava

3. Established in 1923 by Walt & Roy Disney
Largest Media Conglomerate Today
Component of DJIA & S&P500

4.  Movies
 Music
 Disneyland Theme Parks
 Resorts
 Recreational facilities
 Restaurants
 Hotels
 Games
 Consumer Products; etc.

5. $1,800,000 Revenue
3000000
$1,600,000
2500000
Costs and Expense
$1,400,000
$1,200,000 2000000
Income(Loss)Before
$1,000,000 1983
Corporate Expenses 1500000
and Unusual 1984
$800,000
Charges +244%
Corporate Expenses 1000000
$600,000
500000
$400,000
Net Income
$200,000 0
Total Asset Borrowing
$0
1982 1983 1984
Financial development Total Assets & Borrowings

6. Net Income, Total
Assets , Consolidated
Revenues Borrowings
& Corporate expenses
Operating profit before
corporate expenses for
entertainment &
Recreation segment

7. Currency
Exchange
Royalties in Rate Risk
Yen
Disneyland,
Japan

8. Historical Exchange rate of Expected Growth in Yen
Yen/Dollar Royalties
270
25.00
260
257.5
250.8 20.00
250
248.3
246.1
243.6
240 15.00
237.4
230 230.8
229.7 10% Growth
Yen/Dollar 10.00
225.7 20% Growth
220 220.1
5.00
210
0.00
200
1984 1985 10% Growth
1986 1987
1988 1989
1990

9. Hedging
Strategies
Currency Forward Futures Foreign
options Contract Contract Swap Currency loan

10. Hedging method Advantages Disadvantages
Options •Flexibility •Short Term Hedge
•Low transaction cost •Up-Front premium
•Leverage
Futures •Standardized •Short Term Hedge
contracts •Difficult to customize
•High liquidity •Initial Margin
•Low Transaction cost
Forwards •Long Term Hedge •Limits upside potential
•Negotiable size •High Bid Ask spread
•No Initial Margin •Counterparty Risk
Term Loan •Spot exchange rate •Balloon payment at the end
•Long Term Hedge •High Debt
•High Leverage •Expensive
Swap •Long Term Hedging •No upside potential
•Flexibility •Low Market Liquidity
•Off Balance Sheet •Counterparty Risk
Transaction

11. Hedging method Recommendation Reason
Options Not Recommended Doesn’t provide long term
hedge
Futures Not Recommended Doesn’t provide long term
hedge
Forwards Not Recommended Bank requires
Term Loan Recommended Disney can borrow ¥ 15 billion
Swap Recommended Disney can swap ECU

12. 10-year
Loan
7.50%
Annual Yen Bullet 0.75%
Front-end
Loan
Percentage
fees
Rate
Semiannual
interest
payments &
principle
paid at
maturity.

13. Yen Bullet Loan
IRR= 7.753%

14. 1. ECU 80 million ten-year Eurobonds at
100.25% of par, 9.125% coupon, 2%
underwriting fees.
2. ECU/¥ swap intermediated by Industrial
Bank of Japan (IBJ)
3. French state-owned utility interested in
swapping yen debt for ECU debt

15. ECU 80
Million
loan
Price
Fees 2%
100.25%
ECU/Yen
SWAP with
French Utility
Coupon Expenses
9.125% $75,000
USD/ECU
0.7420

16. IRR=7.010%

17. Yen Loan
- IRR:
7.753 %
ECU/Yen
Swap -
IRR:
7.010%
Best Choice - ECU/Yen Swap

18. The Walt Disney • Cost reduction of
0.743%
Company
Industrial Bank of • In total it makes ECU
Japan 400,000
• Cost reduction of 0.28%
French Utility
• Single payment of 1.6
Goldman Sachs Million ECU (2% Fees)

19.  The Walt Disney Co. Accepted Goldman Sachs
Proposal with ECU/Yen swap.
 It was followed by a second ECU note offering
in December 1985.
 Disney began engaging in more foreign
currency swaps in order to take advantage of
attractive borrowing rates.