Walt Disney Company Walt Disney Company (Disney) is a diversified international entertainment company with operations in three business segments. Revenue and operating income data for the three segments are shown below.

The profitability of the leisure-time industry is influenced by various factors including economic conditions, the amount of available leisure time, oil and transportation prices, and weather patterns. Disney management has been very aggressive in raising theme park admission prices. For the 10-year period ending in Year 13, admission prices increased at an annual rate of 89% compared to less than 4% for U.S. consumer price inflation. Disneys Film Entertainment business has grown rapidly because of increasing acceptance of The Disney Channel and, importantly, management efforts to exploit the expanding distribution opportunities available for its extensive video library. Disneys Consumer Products revenue has also grown meaningfully as the company has moved its product mix aggressively toward direct publishing and direct retail and away from higher-margined licensing and royalty income sources. During the fourth quarter of fiscal Year 13 (ending September 30, Year 13), Disney wrote off the full carrying value of Euro Disney. The charge was $350 million ($218 million after tax).

Required:

a. Calculate and disaggregate Disneys return on common equity for each of the two fiscal years ending September 30, Year 9, and September 30, Year 13 (use year-end figures for any ratio computations typically using averages).

Case 8-2 (75 minutes)

a. Computation and Disaggregation of ROCE

	Year 13	Year 9
ROCE	13.34%	23.09%
NOA	5,527	3,243
NFOA	497	199
Equity	5,030	3,044
LEVB	0.10	0.07
NOPAT	654	677
NFEC	17	26
Net income	671	703
RNOA	11.82%	20.87%
NFRD	-3.52%	-13.17%
SpreadE	15.34%	34.04%

^A NOA - Equity

^B NFO/Equity

^C Net income-NOPAT

^D Negative amount indicates net income vs. expense

^E RNOA-NFR

Computations

	Year 13	Year 9
ROCE	$671/$5,030 = .133	$703/$3,044=.231
NOA	$363+$1,390+$609+5,228+$2,272-$2,821-$1,514=$5,527	$381+$224+$+909+3,397+$1,084-$1,262-$1,490=$3,243
NOPAT	($8,529-$6,968-$515)x(1-($403/$1,074))=$654	($4,594-$3,484)x(1-($450/$1,153)=$677

¹ Ending assets are used because information is unavailable to compute average assets.

b. Drawing only on your answers to a and the data available, identify the two components that contributed most to the observed change in Disneys return on common equity between Year 9 and Year 13. State two reasons for the observed change in each of the two components.

Disneys profit margin on sales decreased substantially from Year 9 to Year 13. Some reasons for this change include:

Disney experienced above average growth in the film entertainment business, which has the lowest operating margin of any of its business segments.

Disney experienced deterioration in consumer product margins as the business mix shifted away from licensing and royalty income.

Euro Disney losses and reserve provision (write-off) hurt Year 13 results, as compared with no effect in Year 9.

Disney experienced deterioration in the theme park margins because of lower attendancethis, in turn, stemmed from a slower economy and more expensive admission prices.

The profit margin on sales is offset, to some extent, by the favorable effects of financial leverage as the return on financial assets (other current assets) exceeds borrowing costs. have the answer, but can you tell me in your own words what is going on here?

I have the answer above. In your own words can you tell me what is going here?