The document summarizes an equity valuation of The Walt Disney Company conducted by Sonali Jain. The valuation uses a discounted cash flow model and multiples valuation. The DCF model involves forecasting Disney's earnings over 5 years, estimating cash flows by calculating items like depreciation, capital expenditures and working capital requirements. It also estimates Disney's discount rate and calculates the terminal value. A multiples valuation is also conducted using metrics like P/E, EV/EBITDA compared to competitors. Sensitivity analysis is performed on the discount rate and growth rate. The conclusion notes limitations of the DCF model and importance of understanding the company's fundamentals over precision of methods used.

1. EQUITY VALUATION: THE WALT
DISNEY COMPANY
Submitted By:
Sonali Jain

2. Different Valuation and
Assumptions can be used
for the same firm
depending on the
purpose of the valuation.
In most industries,
valuations are based on
DCF or Multiples, or a
combination of the two.
In companies with
various lines of business,
analysts often conduct a
sum-of-the-parts
valuation.
Introduction: Valuation
Price is the result of supply
and demand in the stock
market, often affected by the
factors that have nothing to
do with the fundamentals of
the business.
Value is the subjective
estimation of the real worth
of the firm based on its
capacity to generate future
cash flows.
Distinction between Price and Value
General Practices

3. Value of the share = Total Equity
No. of shares outstanding
Value
per
share
Price
per
share
QUICK PROCESS SHOWING THE DECISION PROCESS OF BUY AND SELL

4. Valuation Process in Walt Disney
Forecasting
Earnings
Estimating
Cash flows
Estimating
the discount
rate
Comparison
and Reality
Check
Valuation
Based on
Multiples
Conclusion

5. 1.FORECASTING EARNINGS
Started forecasting by making an estimation of
revenues for each business line, looking forward five
years (2011-15).
For Revenues:
Utilized the analysts’ insight by using revenue figures
found on Bloomberg.
For Forecasted Operating Expenses:
Forecasted Revenues * 3 Year Average Percent-of-Sale
figure (found in the common-size statement)
For Corporate Level Expenses:
Used 3- Year Average because they seem stable and
have low impact on the bottom line.
For Income Taxes:
Assumed Marginal Tax Rate of 35% (similar to previous
years)
Method of using common-size
percentages as a basis for forecasting is
not used in Interactive Media Segment
because it is fairly new line and is
currently running at an operating loss.
Interest Expense is taken as a
Percentage of Sales, assuming higher
sales require larger investments with
the associated borrowing costs.
For Restructuring and Impairment
charges, as well as any extraordinary
items, it is assumed that they are zero
on average. Also, if the expense is not
recurring, it is treated as one time item
and assume it to be zero in the future.

6. Discount the
expected cash flow
available to
shareholders.
Discounting free cash
flow (FCF): In this case
FCF for the next 5 years
is estimated.
Its shows Depreciation and Amortization of PPE
in various departments of Walt Disney.
Depreciation is calculated by taking 3 year
average ratio of depreciation to Capex. This ratio
(as given in last) of 91% assumes increasing
investment over the 5 year period.
Depreciation has increased over the period of
time as increasing sales or revenues demand
more use of assets.
Next thing is Capex or Capital Expenditure, Capex
has increased over the period of time as more
investments are needed to increase revenue.
WCR or working capital increases as higher sales
will necessitate higher investments in inventory
and accounts receivable.
Calculate EBIT after taxes i.e.
EBIT * [1-Tax rate].
Add back depreciation (it is a
function of Capex).
WCR are estimated based on the 3
year average ratio to sales.
Capex is estimated based on the 3
year average figure of Capex – to –
Sales.
Estimation of discount rate, to
calculate present values.
Two Methods
MethodofcalculatingFCF:
2. ESTIMATING CASHFLOWS

8. 3. ESTIMATING THE DISCOUNT RATE
By calculating the Cost of Equity (Re) by using Capital
Asset Pricing Model (CAPM) : Re= Rf+ β Rp
Rf= Risk free Rate; Rp= Market Risk Premium ; β = Beta
By calculating the Weighted Average Cost of Capital
(WACC) = [D/(D+E)] * Rd* (1 – Tax Rate) + E/(D+E) * Re
Calculated the terminal value by using gordon growth
model
Terminal value in 2015 is calculated as $ 105 Bn at 1.5%
growth rate and 8% WACC and the present value is
calculated at $ 71 Bn
By adding the discounted cash flows with the terminal
value and subtracting the net debt, estimated equity
value have been calculated.

10. Estimated Forecast
2011 2012 2013 2014 2015
Implied
EV/EBITDA
multiple
9.2 8.6 8.0 7.5 7.1
Implied
P/E
multiple
14.4 13.3 12.4 11.5 10.9
•After estimating the discount rate , we
arrived at the estimated present value
for Disney which we can use to turn
into a multiple (EV/EBITDA multiple).
After calculating the multiples, we
compare these to the market multiples
as well as that to of competitors and
the industry average which helps to
give reality check to our DCF Estimate.
•This differentiation act as a catalyst for
the analyst to make judgments on how
realistic this implied growth rate is.
4. Comparison of Multiples

11. Sensitivity
Analysis
The analysis is done on the estimated
share price for different discount rates
and perpetual growth rates.
This analysis of rate appears as a good
proxy for the DCF valuation’s
dependency on a particular item.

12. In addition to DCF valuation of Disney, they have
also valued Disney on Selection of Multiples.
Multiples valuation are based on Price/E ,
Price/BV, Price/FCF, Price/Sales & EV/EBITDA.
The range of the above varies from $29 to $40.
The assumption in this method is that the
market is right on average.
This assumption is particular problematic in
period of extreme irrational price like Internet
bubble in 2000 and financial crisis in 2008 etc.
Time
Warn
er
New
s
Corp
Viac
om
Ave
rag
e
Disney
Denomina
tor ($)
Estimated
Disney
Share
Price ($)
P/E Ratio 14.45 13.5
2
16.3
2
14.
76
2.09 30.89
Price/Boo
k ratio
1.19 1.68 2.94 1.9
4
20.98 40.63
Price/Sale
s ratio
1.50 1.39 2.13 1.6
7
20.10 33.63
Price/FCF
ratio
15.17 16.0
9
16.2
2
15.
83
2.15 33.99
EV/EBITD
A ratio
8.10 9.07 9.75 8.9
7
4.91 28.97
5. VALUATION BASED ON MULTIPLES

13. Conclusion
We have made the model by using the DCF model to compute the current value of the
company.
Limitations of the DCF model
 It is based on assumptions which depend from analyst to analyst.
 It is highly susceptible to the changes in the assumptions.
Thus, because of the forecasts done in the model regarding revenue growth, operating
margins based on the assumptions. It is advisable to not fall into personal biases or
others judgements while making assumptions and should clearly understand the firm
before making assumptions. Its fundamentals, Management reports and discussions,
recent trends, and future developments are to be taken into consideration. Thus an
accurate view of the firm’s competitiveness is much more important than the precision
of the methodology.