QUESTION 2

MINICASE PLANNING New MAGIC AT DISNEY After its success domestically, the Walt Disney Company firm. The financing plan would change Euro Disneyland (Disney) decided to share its magic with the rest of the from an internally financed, privately owned project into world. After successfully opening Tokyo Disneyland, a highly leveraged, publicly owned entity in which Disney was moving around the world to create Euro Disney would hold only a minority interest. This table Disneyland. The financing plan for Euro Disneyland provides financial projections for the first five years of included an initial public offering by the main project operations. FINANCIAL PROJECTIONS FOR EURO DISNEYLAND (MILLIONS OF EUROS) YEAR 1 2 3 4 5 4,246 0 1,236 4,657 0 2,144 5,384 0 3,520 5,853 0 5,077 6,41 3,128 6,386 5,482 6,801 8,904 10,930 15,929 Revenues Magic Kingdom Second theme park Resort and property development Total revenues Operating expenses Magic Kingdom Second theme park Resort and property development Total operating expenses Operating income 2,643 0 796 2,836 0 1,501 3,161 0 2,431 3,370 0 2,970 3,641 1,794 3,694 3,439 2,043 4,337 2,464 5,592 3,312 6,340 4,490 9,129 6,800 Other expenses (income) Royalties Preopening amortization Depreciation Interest expense Interest and other income Lease expense 302 341 255 567 (786) 958 55 1,692 351 147 204 333 341 263 575 (788) 950 171 1,845 619 260 359 387 341 290 757 (768) 958 477 2,442 870 366 504 422 341 296 708 (778) 962 963 2,914 1,676 704 972 717 341 625 1,166 (790) 975 1,820 4,854 1,946 818 1,128 Management incentive fees Total other expenses (income) Profit before taxation Taxation Net profit *Includes the Magic Kingdom Hotel. Source: Euro Disneyland S.C.A., Offer for Sale of 10,691,000 Shares, p. 36. . a . . QUESTIONS 1. Using the format of the table as a guide, project the net profit for the following 20 years (years 6 to 25) based on the following assumptions: Each class of revenue after year 5 grows at a 5% annual rate. Each class of operating expenses after year 5 grows at a 5% annual rate. In other expenses (income), royalties equal 5% of total revenues. In other expenses (income), preopening amortiza- tion is zero after year 5. Annual depreciation, annual interest expense, annual interest and other income, and annual lease expense are constant after year 5. Management incentive fees grow at a 7.5% annual rate. Euro Disneyland's income tax rate is 42%. 2. Calculate the present value of Euro Disneyland's equity at time 0 (when the park opens) and at time 3 (the time of the initial public offering, three years before the opening). Use the following assumptions: Dividends are 75% of net profit for years 1 to 25. At the end of year 25, the terminal value of equity is worth 10 times the year's net profit. Euro Disneyland's cost of equity capital is 15%. 3. Recalculate the value for Euro Disneyland estimated at time-3 for two cases in which the assumptions are changed to the following: a. Revenues after year 5 grow at 6% and operating expenses grow at 5%. b. Revenues after year 5 grow at 5% and operating expenses grow at 6%. . . . MINICASE PLANNING New MAGIC AT DISNEY After its success domestically, the Walt Disney Company firm. The financing plan would change Euro Disneyland (Disney) decided to share its magic with the rest of the from an internally financed, privately owned project into world. After successfully opening Tokyo Disneyland, a highly leveraged, publicly owned entity in which Disney was moving around the world to create Euro Disney would hold only a minority interest. This table Disneyland. The financing plan for Euro Disneyland provides financial projections for the first five years of included an initial public offering by the main project operations. FINANCIAL PROJECTIONS FOR EURO DISNEYLAND (MILLIONS OF EUROS) YEAR 1 2 3 4 5 4,246 0 1,236 4,657 0 2,144 5,384 0 3,520 5,853 0 5,077 6,41 3,128 6,386 5,482 6,801 8,904 10,930 15,929 Revenues Magic Kingdom Second theme park Resort and property development Total revenues Operating expenses Magic Kingdom Second theme park Resort and property development Total operating expenses Operating income 2,643 0 796 2,836 0 1,501 3,161 0 2,431 3,370 0 2,970 3,641 1,794 3,694 3,439 2,043 4,337 2,464 5,592 3,312 6,340 4,490 9,129 6,800 Other expenses (income) Royalties Preopening amortization Depreciation Interest expense Interest and other income Lease expense 302 341 255 567 (786) 958 55 1,692 351 147 204 333 341 263 575 (788) 950 171 1,845 619 260 359 387 341 290 757 (768) 958 477 2,442 870 366 504 422 341 296 708 (778) 962 963 2,914 1,676 704 972 717 341 625 1,166 (790) 975 1,820 4,854 1,946 818 1,128 Management incentive fees Total other expenses (income) Profit before taxation Taxation Net profit *Includes the Magic Kingdom Hotel. Source: Euro Disneyland S.C.A., Offer for Sale of 10,691,000 Shares, p. 36. . a . . QUESTIONS 1. Using the format of the table as a guide, project the net profit for the following 20 years (years 6 to 25) based on the following assumptions: Each class of revenue after year 5 grows at a 5% annual rate. Each class of operating expenses after year 5 grows at a 5% annual rate. In other expenses (income), royalties equal 5% of total revenues. In other expenses (income), preopening amortiza- tion is zero after year 5. Annual depreciation, annual interest expense, annual interest and other income, and annual lease expense are constant after year 5. Management incentive fees grow at a 7.5% annual rate. Euro Disneyland's income tax rate is 42%. 2. Calculate the present value of Euro Disneyland's equity at time 0 (when the park opens) and at time 3 (the time of the initial public offering, three years before the opening). Use the following assumptions: Dividends are 75% of net profit for years 1 to 25. At the end of year 25, the terminal value of equity is worth 10 times the year's net profit. Euro Disneyland's cost of equity capital is 15%. 3. Recalculate the value for Euro Disneyland estimated at time-3 for two cases in which the assumptions are changed to the following: a. Revenues after year 5 grow at 6% and operating expenses grow at 5%. b. Revenues after year 5 grow at 5% and operating expenses grow at 6%