the question: suppose the terminal value at the end of 1996 is estimated at 7x the net income for 1996. Using a 15% cost of capital, what is the range of net present values of Euro Disneyland as a STAND-ALONE project?

It is 1987, and in a muddy sugar-beet field 20 Chunnel, the tunnel under the English Channel) miles east of Paris, Walt Disney Co. is creating are in place. Euro Disneyland. By the time of its scheduled But there is risk nonetheless. The most critical opening in 1992, Euro Disneyland (EDL) is variable is attendance. Many experts think surexpected to cost FF 15 billion ( $2.5 billion based prises may await Disney. They doubt that attenon an exchange rate of FF 6=$1 ). Most signs dance will meet Disney's expectations. Others point to the park's success. Two million Europeans think that the crowds will come but will spend already visit its American parks every year. And less than Disney projects. Disney faces other Paris demographics look great: In two hours, 17 unknowns as well. MCA/Universal, which will million people could drive to the park and 310 be bought by Matsushita in 1990, is thinking million people could fly to the park. Disney's risk appears to be modest. It has cannibalize Euro Disneyland's attendance. There's invested $350 million in planning the park butt also the grim winter weather, which prompts has put up just $145 million for 49% of EDI's European parks to close until spring. Then there's equity. Public investors will pay $1 billion for the challenge of training 12,000 Europeans, half the other 51% in a stock offering in October of them French, to be Disney "cast members." 1989. The public company, through its traded Bowing to French individualism, Disney will relax shares, will give Europeans a chance to partici- its personal grooming code a bit. Disney may also pate in the success of the project once the gates decide to change its ban on booze if customers open in 1992. (When the stock begins trading call loudly enough for wine and beer. Disney on the Paris Bourse in October 1989. Disney's claims that its experience with Tokyo Disneyland, stake will be valued at $1 billion - an $855 mil- its last major development project, shows that it lion gain in value) can deal with non-American culture and bad Even if profits are weak, Disney will rake in weather. Tokyo Disneyland was completed on fat management fees. And it could clean up just time and within 1% of budget. It has also been on the land: It has rights to buy 4,800 acres a huge commercial success. from the government at just $7,500 an acrecompared with $750,000 an acre for similar land in the area. Disney can resell chunks to Financing other developers for any price it can get. The In March 1987, Disney and the French governacreage should jump in value once high-speed ment sign a "Master Agreement" for Euro rail lines from Paris and London (via the Disneyland. In accordance with that agreement, Disney forms a holding company to control Disney will structure the $2.5 billion Euro development of the entire site. It pays $145mil - Disneyland project so that the operating losses lion for 49% of the holding company's shares created during construction can be used, along and sells 51% of EDL to European investors for with the accelerated depreciation benefits, as tax a little over $1 billion; of the latter shares, shelters. These tax benefits will be sold to a group around half are sold to the French. of French companies for $200 million. Equity The holding company set up as an SCA contributions include the $1.15 billion stock sale (Societ Commandite par Actions), a unique plus Disney's $350 million investment in project French corporate form that is very similar to an planning. The remaining $800 million of project American limited partnership. Disney is the ger- financing will come from loans subsidized by the ant, or general partner. The SCA structure allows French government. The repayment schedule on Disney to control management, even with a these loans is as follows (in FF millions): minority shareholding. Thus, even though the holding company owns EDL, Disney will manage it and collect an estimated $35 million a year in royalties on sales of admission tickets, food, and souvenirs. The master agreement is basically an inducement for Disney to bring Euro Disneyland to Paris rather than to Spain's Mediterranean coast. million in working capital initially, and this The inducements include the following: amount is expected to grow at the rate of sales - Loans of up to FF 4.8 billion are avail- revenue. The working capital will be financed by able from a French government agency. The French franc bank loans carrying an interest rate loans carry a fixed interest rate of 7.85%, in con- expected to average about 9.5% annually. trast to a normal commercial rate of 9.25%. Financial Projections - EDL can use accelerated depreciation to write off the construction costs of its extravagan- Disney's projections assume a minimum 1992 za over a 10-year period. attendance rate at Euro Disneyland of 11 million w. The French government will invest visitor-days and maximum of 16 million. These $350 million in park-related infrastructure. This numbers compare with 1988 attendance at the includes sewer and telephone trunk lines, domestic U.S. parks of 25.1 million for Orlandos subway and road links to Paris, and a new Disney World and 13 million for Anaheims line of its 156-mile-per-hour train a grande Disneyland. In projections of future years' attenvitesse (TGV) that will link EDL to the dance, a conservative 3% annual growth rate is Chunnel (and thence to London), Brussels, reasonable. The range of EDL attendance figures based on these assumptions is shown in Exhibit V 2.1. is allowed to buy 4,800 acreas of The next step is to forecast individual expenprices. The average cost is FF 11.1 ditures at the park on a daily basis, for admismere compared with FF 1,000 per sion as well as for food and merchandise. square meter for development land in the Paris Disney's projections assume that each visitor will suburbs. spend FF 78.6 on merchandise, FF 59.5 on food - The French government agres 10 CUI and beverage, and FF 5.5 on parking and other the value-added tax (VAT) on ticket sales to just items (eg og stroller rentals). Admission fees are 7% instead of the usual 18.5%. estimated al FF 1444.4 apiece. Disney will collect 30% of the parks OCF in the range of FF 1.42.1 billion; 40% of all OCF between FF 2.1 and 2.8 billion; and 50% of all OCF above FF 2.8 billion. Disney will receive no incentive fee if the parks OCF is less than FF 1.4 billion. In this case, the operating cash flow will equal operating income as Disney has sold its depreciation tax benefits. In November 1989, Walt Disney Co. announced plans to add a movie studio theme park as the second gated attraction to Euro Source: Liz Buyer, "EuroDisney: As Close to Risk Free as a Deal Disneyland. The movie studio theme park is Can Get," The Journal of European Business, March/April 1992, expected to open in 1996. In addition to p. 27. Reprinted with permission of Journal of European Buciness strengthening Disney's film production capabiliand Faulkner and Gray ties in Europe (where the movement to enforce geographic quotas continues to gain momentum), the second attraction could add as much as These estimates are based on 1989 francs. FF 3.3 billion to 1996 operating revenues. French inflation is expected to increase these figures by 59 each year. As of late 1989, the Questions French franciollar exchange rate was about FF 6=$1, but this rate could obviously vary (FF 4.8 billion at FF 6=$1 ) in French govern- 1. These questions are related to the $800 million ed to average about 4% annually, about 1% below ment-subsidized loans. the expected French inflation rate. a. What is the value to Disney of the French Euro Disneyland will also collect "participagovernment's loan subsidies? tion fees" from various corporate sponsors, such b. What exchange risk is this project subject to as Kodak and Renault. These fees are payment from the standpoint of Disney? How can for the privilege of sponsoring specific attractions financing be used to mitigate this exchange in return for promotional considerations (e.g., risk? Krafts "The Land") and are expected to approxi- c. Suppose it turns out that having $800 milmate $35 million in 1992 . lion in frane financing actually adds to EDL's pretax operating margin is expected to Disney's economic exposure. How should be about 35%. That money will not all flow into the hands of EDL shareholders. EDL must pay this affect Disney's willingness to accept interest on its debt and French tax. The effective tax rate is estimated at 55%. In addition, EDL 2. Based on purchasing power parity. project the must pay Disney royalties, a base management_ dollar.franc exchange rate from 1989 through fee, and an incentive-based bonus fee. Under 1996. the master agreement, Disney will collect 10% 3. What is the range of projected dollar net of the revenues generated by ticket sales and 5% income for Euro Disneyland for the years of all expenditures on food, beverage, and mer 1992-1996? chandise. Disney also can collect significantly 4 Suppose the terminal value at the end of 1996 higher fees from EDL if the park exceeds certain . is estimated at seven times net income for operating cash flow (OCF) targets Specifically, 1906. Uising a 15\% cost of capital, what is the