Use the following information on Disney to answer the case questions. Disneys current stock price is $140.00 per share. The average growth rate of the companys dividend has been 17.7% from 2004 through 2018. Disneys return on equity is 28.0% and the company retains approximately 80.0% of its profits while paying out the remaining 20.0% in dividends. The companys stock currently trades at 21.21 times its current year earnings estimate of $6.60 per share. Analysts expect the company to earn $6.19 per share in 2020 and $6.93 in 2021. Disneys peers in media networks trade at 25.5 times their current year earnings estimates while peers in parks, experi- ences and consumer products at 21.9; studio entertainment at 19.1 and DTCI at 14.1. Assume the expected return for Disneys stock is 6.9%.

Question

What is Disney stocks intrinsic value using each of the four models?

Constant Growth Model Multi-Stage Growth Model Discounted Dividend Model Market Multiples Approach

4G O 41% 10:24 PM { CASE STUDY Eq... 1 Bloomberg CASEO Businessweek STUDIES My Equity Analysis and Valuation Understand and compare the theoretical equity valuation methods to the more commonly-used multiple valuation approach, and then apply these tools to value a company. Disney Segment Revenues and Operating Income All Carol Fiscal 2018 in Alona, Executoren Revenues of Tomorating income Media Newaris 7338 FLIP 2470 11% GOAS hronisinant IORS 175 DOTI 30 -7% S of Tete 4. 12 riman - 6.885 Total 9.434 Source: The Disney Company ACE 10K Deney Operatin Margiroby Segment and Consolidated This supplement explores the reasoning behind and the disad- vantages of the three theoretical equity valuation models-con- stant growth model, multi-stage growth mexel, and dividend discount model-by comparing them to the most frequent ly-used market multiple valuation approach through the lens of General Electric (GE). Subsequently, we will do the same valuations and compar- sous with The Walt Disney Company (Disney) for homework. .HOW DISNEY MAKES MONEY Disney has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-consumer & International. The table shows the pro- portion of Disney's total revenues and operating income that come from each segment. Networks Durant Cara SOU WILL Compatty WOER. 105 PCC Me Netwer DOT De Carded Charmant HOW DISNEY MAKES MONEY Disney has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-Consumer & International. The table shows the pro- portion of Disney's total revenues and operating income that come from each segment. ECUITY ANALYSIS AND VALLIATION / BLOOMBERG BUSINESRWEEK CARE STUDY TEX KAN 40 20% 100 THINKING ABOUT VALUATION assumption that a company's dividends grow at a constant rate Consider purchasing a house. The fundamental valuation metric forever. The intrinsic value of a company's equity is calculated in a house purchase is square feel. A person interested in pur- by dividing a company's dividend for next year, labelled Di, lvy chasing a house should look at the listing price per square foot the difference between the stock's expected return, labelled k, and compare il to the price per square foot of other houses that and its dividend growih rate, Labelled g- recently sold in the area. If the current market for new homes A primary weakness of the constant growth model is that is $112 per square foot and the target home is listed at $124 per very few, if any, companies grow their dividends at a constant square foot, the target home may be overvalued. Focus on the growth rate. This central condition is unreasonable and unlikely word may. Ti may be that the target home is superior to the prop toever be met ly any company. The graph below shows the div- erties used as comparables. Perhaps the target home is in a nicer idend growth rates for The Walt Disney Company since 2004. It neighborhood or is built to a higher standard or has other char is clear that there is nothing constant about its dividend growth. acteristics that warrant a premium to the comparable proper ties. All of these characteristics need to be considered. But the Disney Dividend Growth Rates beginning point of any valuation is uncovering the fundamen Annual Growth Rates in US Dollars, including Average tal valuation metric of the asset, which in the case of our real Source The Walt Disney Company Annual Report (10-K) estate example, is square feet. 1205 When valuing stock, the fundamental valuation metric may 100% be profit, cash flow, or dividends. These cash flows are made to investors as a reward for their investment. Since they are made after the asset has been purchased, appropriate valuation techniques determine the present value of these cash flows to . 0.0% TN uncover the intrinsic value of the stock. Each of the four equity valuation metrics used in this case arrive at the intrinsic value of Disney's stock by discounting the shareholder rewards (or returns) from the dates they will be paid in the future to our 05 06 07 08 09 11 12 15 17 18 decision point in the present. DISNEY'S NUMBERS The constant growth model also rests on a second condition, Use the following information on Disney to answer the case that the denominator's result of the expected return minus the questions. dividend growth rate must be a positive number. Disney's current stock price is $140.00 per share. The aver Multi Stage Growth age growth rate of the company's dividend has been 17.7% from The multi-stage growth model is designed to partially remedy 2004 through 2018 one of the constant growth model's primary flaws, that is, that no company grows its dividends at a constant rate forever. The Disney's return on equity is 28.0% and the company retains multi-stage model assumes that a company's dividends grow in approximately 80.0% of its profits while paying out the remain two periods. The first is a period of fast growth that lasts for a ing 20.0% in dividends. determined period of time. The second is a period character- ized by slower growth that lasts forever. Technology compa- The company's stock currently trades at 21.21 times its curnies exhibit fast growth during their early years, followed by rent year earnings estimate of $6.60 per share. slower growth Analysts expect the company to earn $6.19 per share in 2020 Discounted Dividend Model and $6.93 in 2021 There are three primary steps used to calculate a stock's intrin- sic value using the discounted dividend model. First, the divi Disney's peers in media networks trade at 25-5 times their dends for future years must be calculated. Second, the terminal current year earnings estimates while peers in parks, experi- value of the stock must be calculated. Third, dividends are ences and consumer products at 21.9; studio entertainment at placed in a timeline using a spreadsheet or calculator and the 19.1 and DTCI at 14.1. stock's net present value is calculated. Assume the expected return for Disney's stock is 6.9%. Market Multiples Approach In the strictest terms, all the valuation models discussed up to THE FOUR MODELS this point could be considered dividend discount models since Constant Growth Model they attempt to find the present value of future cash flows and/ The constant growth model, also known as the Gordon Growth or dividends. Model, discounts future cash flows, or dividends, under the Bloomberg LP 4G O 41% 10:24 PM { CASE STUDY Eq... 1 Bloomberg CASEO Businessweek STUDIES My Equity Analysis and Valuation Understand and compare the theoretical equity valuation methods to the more commonly-used multiple valuation approach, and then apply these tools to value a company. Disney Segment Revenues and Operating Income All Carol Fiscal 2018 in Alona, Executoren Revenues of Tomorating income Media Newaris 7338 FLIP 2470 11% GOAS hronisinant IORS 175 DOTI 30 -7% S of Tete 4. 12 riman - 6.885 Total 9.434 Source: The Disney Company ACE 10K Deney Operatin Margiroby Segment and Consolidated This supplement explores the reasoning behind and the disad- vantages of the three theoretical equity valuation models-con- stant growth model, multi-stage growth mexel, and dividend discount model-by comparing them to the most frequent ly-used market multiple valuation approach through the lens of General Electric (GE). Subsequently, we will do the same valuations and compar- sous with The Walt Disney Company (Disney) for homework. .HOW DISNEY MAKES MONEY Disney has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-consumer & International. The table shows the pro- portion of Disney's total revenues and operating income that come from each segment. Networks Durant Cara SOU WILL Compatty WOER. 105 PCC Me Netwer DOT De Carded Charmant HOW DISNEY MAKES MONEY Disney has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-Consumer & International. The table shows the pro- portion of Disney's total revenues and operating income that come from each segment. ECUITY ANALYSIS AND VALLIATION / BLOOMBERG BUSINESRWEEK CARE STUDY TEX KAN 40 20% 100 THINKING ABOUT VALUATION assumption that a company's dividends grow at a constant rate Consider purchasing a house. The fundamental valuation metric forever. The intrinsic value of a company's equity is calculated in a house purchase is square feel. A person interested in pur- by dividing a company's dividend for next year, labelled Di, lvy chasing a house should look at the listing price per square foot the difference between the stock's expected return, labelled k, and compare il to the price per square foot of other houses that and its dividend growih rate, Labelled g- recently sold in the area. If the current market for new homes A primary weakness of the constant growth model is that is $112 per square foot and the target home is listed at $124 per very few, if any, companies grow their dividends at a constant square foot, the target home may be overvalued. Focus on the growth rate. This central condition is unreasonable and unlikely word may. Ti may be that the target home is superior to the prop toever be met ly any company. The graph below shows the div- erties used as comparables. Perhaps the target home is in a nicer idend growth rates for The Walt Disney Company since 2004. It neighborhood or is built to a higher standard or has other char is clear that there is nothing constant about its dividend growth. acteristics that warrant a premium to the comparable proper ties. All of these characteristics need to be considered. But the Disney Dividend Growth Rates beginning point of any valuation is uncovering the fundamen Annual Growth Rates in US Dollars, including Average tal valuation metric of the asset, which in the case of our real Source The Walt Disney Company Annual Report (10-K) estate example, is square feet. 1205 When valuing stock, the fundamental valuation metric may 100% be profit, cash flow, or dividends. These cash flows are made to investors as a reward for their investment. Since they are made after the asset has been purchased, appropriate valuation techniques determine the present value of these cash flows to . 0.0% TN uncover the intrinsic value of the stock. Each of the four equity valuation metrics used in this case arrive at the intrinsic value of Disney's stock by discounting the shareholder rewards (or returns) from the dates they will be paid in the future to our 05 06 07 08 09 11 12 15 17 18 decision point in the present. DISNEY'S NUMBERS The constant growth model also rests on a second condition, Use the following information on Disney to answer the case that the denominator's result of the expected return minus the questions. dividend growth rate must be a positive number. Disney's current stock price is $140.00 per share. The aver Multi Stage Growth age growth rate of the company's dividend has been 17.7% from The multi-stage growth model is designed to partially remedy 2004 through 2018 one of the constant growth model's primary flaws, that is, that no company grows its dividends at a constant rate forever. The Disney's return on equity is 28.0% and the company retains multi-stage model assumes that a company's dividends grow in approximately 80.0% of its profits while paying out the remain two periods. The first is a period of fast growth that lasts for a ing 20.0% in dividends. determined period of time. The second is a period character- ized by slower growth that lasts forever. Technology compa- The company's stock currently trades at 21.21 times its curnies exhibit fast growth during their early years, followed by rent year earnings estimate of $6.60 per share. slower growth Analysts expect the company to earn $6.19 per share in 2020 Discounted Dividend Model and $6.93 in 2021 There are three primary steps used to calculate a stock's intrin- sic value using the discounted dividend model. First, the divi Disney's peers in media networks trade at 25-5 times their dends for future years must be calculated. Second, the terminal current year earnings estimates while peers in parks, experi- value of the stock must be calculated. Third, dividends are ences and consumer products at 21.9; studio entertainment at placed in a timeline using a spreadsheet or calculator and the 19.1 and DTCI at 14.1. stock's net present value is calculated. Assume the expected return for Disney's stock is 6.9%. Market Multiples Approach In the strictest terms, all the valuation models discussed up to THE FOUR MODELS this point could be considered dividend discount models since Constant Growth Model they attempt to find the present value of future cash flows and/ The constant growth model, also known as the Gordon Growth or dividends. Model, discounts future cash flows, or dividends, under the Bloomberg LP