Equity Valuation: The Walt Disney Company

Introduction to Valuation Methods
Usage of valuation methods differ with the purp
ose of valuation. The Walt Disney Company
is valued for stock market investors.
Purpose
Disney conduct sum-of-parts valuation becau
se this company is involved in various lines of
business. In this type of valuation, appropriate
method is applied to different type of business
line.
Basis of valuation
Total Equity Value / Number of shares
outstanding
Value per share
Value per share is compared with the price
per share in stock market to make buy or s
ell decision
Buy or Sell Decision
Price is the result of demand and supply in the
stock market whereas value is the estimation
of real worth of the firm based on its capacity t
o generate future cash flows.
Price & Value
Basis
DCF Multiples
Combination of
both
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Valuation Process
Step 4Step 3Step 2Step 1
Forecasting
Earnings
Estimating Cash
Flows
Estimating The
Discount Rate
Comparison and
Reality Check
Valuation Based
on Multiples
Step 5

STEP 1: Forecasting earnings
Example –Estimating operating expenses for media network based on 3-year average percent of-sale
The forecasted revenue are multiplied by the three-year average percent-of-sale figure (Exhibit 3) to estimate cost items.
The forecasted revenue are then used for forecasting other items in the income statement.
Revenue is forecasted based on –
Guidance from the management Personal experience and judgement of the analyst Adjustments for any trends or circumstances in the sector
Revenue forecasting - The income statement of the company is forecasted by making an estimation of revenues of each business line.
The first step explained for the valuation Of the business is Forecasting the income statement by the estimation of revenues.

STEP 1 (Contd.)
Income tax 35% marginal tax rate is taken.
Interest expense id taken percent of sale as higher sales require larger investment with associated borrowing cost.
The restructuring and impairment changes and extraordinary items are assumed to be zero on average, as recurring
earning and expenses are taken.
Forecasting cannot be done for Interactive media as it is running at operating loss.
3 year-average is taken because recent technological changes will represent trend of moving forward better than longer
time span average

STEP 2: Estimating Cash Flows
WCR
EBIT
Depn.
&
Amort.
Capex
To calculate the
discounted value
of future cash
flows, we need to
adjust:
Calculation of EBIT after taxes.
• EBIT (1-tax rate)
Adding back depreciation and amortization.
• Depn. is indirectly impacted by Capital Expenditure.
• Therefore, Depn.-to-Capex ratio is used to estimate depn.
Adjusting Working Capital Requirements
• WCR are impacted by by sales.
• Therefore, WCR are estimated based on a 3 yr estimated ratio to sales.
Capital Expenditure
• Using similar logic as above, apex is estimated based on a 3 yr average
figure of Capex-to-sales.
• This is because more investments are needed to increase the revenues.

STEP 3: Estimating the Discount
Rate
• For discounting FCFF we need to consider both, cost of equity (return required by shareholder) and cost of debt
(return required by debt holders)
• Discount Rate
WACC =
𝐷𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦
* Rd
* (1 – Tax Rate) +
𝐸𝑞𝑢𝑖𝑡𝑦
𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦
∗ Re
Where, Re
= Cost of Equity = RF
+ β * (RM
– RF
); CAPM
Rd= Cost of Debt (pre-tax)
RF
= Risk Free Rate
RM
– RF
= Market Risk Premium
Assumption
Risk Free Rate: 10 Years U.S. Treasury bond yield 3.50%
Market Risk Premium 5.50%
Beta 1.12
Cost of Equity 9.66%
Cost of Debt (Pre-Tax) 4.00%
Target Debt Ratio 30.00%
Tax Rate 35.00%
WACC (Approx.) 8%

STEP 3 (Contd.)
• For determining the Terminal value FCF, we are using Gordon Growth Model
Po =
𝐷 𝑜 ∗(1+𝑔)
(𝑘 −𝑔)
; where Po = Current Share Price, 𝐷 𝑜 = Current Dividend,
𝑔 = Long term growth rate, k = discount rate (WACC)
• We could also use the long term average EV/EBITDA multiple for determinin
g the terminal value.
FY2015
EBIT 10695
Less: Taxes (35%) 3743.25
Add: Depreciation & Amortization 2262
Less: Capital Expenditure 2472
Less: Change in Working Capital Requirements 42
Terminal Value in 2015 (Perpetuity of onward 2015 Cash flow) 106242
112941.7
Enterprise Value 95233**
Net Debt 28569.9
Equity 66663.1
No. of Share 1894
Estimated Share Price 35.19699
Cash Flow 2015 6699*
Assumed Growth Rate 1.50%
WACC 8%
Terminal Value in 2015
104114
.6
Present Value of Terminal Value
70757.
8
Terminal Value as %age of Enterprise Val
ue
74.300
%

Multiples like P/E or EV/EBITDA can be calculated once estimated present value of the company
is calculated.
Above multiples are used for comparison with multiples of Market, competitors and Industry
average.
Difference in estimates with respect to market and industry averages gives reality check on DCF
estimate.
To make judgements on reality of implied growth rate, sometimes reverse valuation where
backward DCF valuation method can be used to see what growth rate is implied by the current
share price.
DCF valuation method is used to estimate share prices for various different rates WACC and
different growth rate for the Terminal Value.
STEP 4: Comparison and Reality Check

STEP 4 (Contd.)
Sensitivity analysis shows the changes in estimated
share price(using DCF valuation method) with changes
in WACC and growth rate.
Perpetual growth rate is the best drivers of the Terminal
Value, thus sensitivity analysis of this rate proves DCF
valuation’s dependency on Terminal Value.
On increasing Perpetuity growth rate with WACC
constant, value of estimated share price increases.
On the other hand, increasing WACC and keeping
perpetuity growth decreases the value of estimated
share price.
DCF Sensitivity Analysis

Value Based on Multiples
In this method we also valued Disney based on a selection of multiples. A multiple is a ratio of market value to a measure of firm performance or
fundamental value such as earnings, book value, sales or free cash flows.
Comparing multiples of similar firms, an investor can perform a relative valuation. In this method, we have used the average multiples of
comparable firms (Time Warner, News Corp and Viacom) and applied these to the relevant drivers for Disney. In this example, we are given Disney
Denominators as on 2010 for EPS, BV per share, Sales per share, FCF per share, EBITDA per share and multiplying them with the average
multiples (of comparable firms) of P/E ratio, Price/Book ratio, Price/Sales Ratio, Price/FCF ratio and EV/EBITDA ratio respectively to arrive at
Estimated Disney Share Price which ranges from $29 to $40 (which is a reasonable spectrum around the DCF valuation).
The implicit assumption in multiples-based valuation is that the market is right on average. This assumption is particularly problematic in periods
of extreme irrational prices across the board (e.g., the financial crisis in 2008, etc.)
Some analyst suggest comparing current multiples with historical multiples and also computing cycle adjusted multiples (e.g., averaging earnings
of the last 10 years).

CONCLUSION
DCF method is widely us
ed but it has its own limita
tions. It is highly suscepti
ble to changes in assump
tions. It is always crucial t
o question the assumptio
ns made for valuation.
The final valuation estima
te is not the ultimate ans
wer. One should also und
erstand how share price
was derived and what ass
umptions are behind the fi
gures.
1 2

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Equity Valuation: The Walt Disney Company

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