Disney vs TimeWarner Financial Ratio

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The Walt Disney Company

Christina Russell
FIN 6406 – Strategic Financial Management
Dr. Frye

Table of Contents
Part 1: The Company

Page: 2 - 5

Part 2: Financial Planning and Analysis

Page: 6 - 10

Part 3: Dividend Growth Model

Page: 11

Part 4: Capital Asset Pricing Model (CAPM)

Page: 12

Part 5: Weight Average Cost of Capital (WACC)

Page: 13-14

Part 6: Estimating Walt Disney Company’s Value

Page: 15-17


Page: 18

A: Income Statement for Disney and Time Warner

Page: 19-22

B: Balance Sheet for Disney and Time Warner

Page: 23-26

C: Cash Flow for Disney and Time Warner

Page: 27-30

D: Ratios for Disney and Time Warner

Page: 31-41

E: Value Line for Disney and Time Warner

Page: 42-43

F: The Walt Disney Company 10-K

Page: 44

*Appendices A, B, and C were derived from Google Finance
*Appendix D was derived from Reuters.com
*Appendix E was derived from Valueline.com


The Company
It all started with a mouse…
Mission: The Walt Disney Company's objective is to be one of the world's leading producers
and providers of entertainment and information, using its portfolio of brands to differentiate its
content, services and consumer products. The company's primary financial goals are to
maximize earnings and cash flow, and to allocate capital profitability toward growth initiatives
that will drive long-term shareholder value.
The Walt Disney Company is the world’s largest media and entertainment conglomerate
with assets encompassing media networks, studio entertainment, parks and resorts, and
consumer products. The Walt Disney Company’s television and media network assets include
the ABC television network, and ten broadcast stations. In addition, Walt Disney’s portfolio of
cable networks include: ABC Family, Disney Channel, Toon Disney, and ESPN (80% ownership).
The Walt Disney Studios produces films through lines such as Walt Disney Pictures, Touchstone,
and Pixar. With the recent acquisition of Marvel Entertainment, the Walt Disney Company
enters as a top comic book publisher and film producer. Studio entertainment produces and
acquires live-action and animated motion pictures for distribution to the theatrical, home video
and television markets. Theme parks and resorts include the operations of the Walt Disney
World Resort in Florida, Disneyland Park, the Disneyland Hotel and the Disneyland Pacific Hotel
in California. Consumer products segment includes merchandise licensing, publishing.
The Walt Disney Company has a prestigious history in the entertainment industry,
stretching over 75 years. Since its inception in 1923, the Walt Disney Company and additional
affiliated businesses have remained committed to produce supreme entertainment experiences
based upon the rich legacy of quality creative content and incomparable storytelling. Within
the past few decades, Disney has moved into a wider market, beginning the Disney Channel on
cable and establishing subdivisions such as Touchstone Pictures to produce films other than the
usual family-oriented fare, gaining a firmer footing on a broader range. Starting in 1984, Disney
enjoyed an enormous creative and financial renaissance, in part to the leadership of CEO
Michael Eisner, the success of all its subsidiaries, sales through the Disney Stores, and a

recommitment to excellence in developing original feature-length animated films. Under
Eisner’s guidance, Disney acquired Capital Cities/ABC in 1996, a $19 billion deal that increased
the company’s stature immensely (Sander, 1). Adding to the theme parks, cruise ships,
professional sports teams, and dozens of other businesses owned by the company, the
acquisition of Capital Cities/ABC gave Disney the power of broadcasting and the ability to meld
entertainment content with programming. During the late 1990s, the company was
aggressively building a presence on the Internet and adopting a concentrated approach to
international expansion. Disney has traditionally relied on its existing creative components to
continually produce new original properties to fuel the consumer products sales however in
2009 the media giant purchased Marvel for $4.3 billion in cash and stock. The deal expanded
Disney’s stable of intellectual property with the addition of such characters as Iron Man, SpiderMan, and the X-Men. Which have all been turned into successful Hollywood blockbusters and
licensed for other purposes (Hoovers, 1).
“I knew if this business was ever to get anywhere, if this business was ever to grow, it could
never do it by having to answer to someone unsympathetic to its possibilities, by having to
answer to someone with only one thought or interest, namely profits. For my idea of how to
make profits has differed greatly from those who generally control businesses such as ours. I
have blind faith in the policy that quality, tempered with good judgment and showmanship, will
win against all odds.”—Walt Disney
When the Walt Disney Company initially began, it was under the control of Walt himself.
Throughout his reign, he developed a culture to create experiences and “magical moments” for
all his “guests” this philosophy from the beginning has created a long-lasting brand name
known for producing a quality product or experience. This Disney culture has succeeded
through tight control over how the brand and image is perceived. Disney has become one of
the most recognized and renowned brand names throughout all industries. In addition to its
well-known brand name, Disney has developed famous characters to add to its image (ex.
Mickey, Minnie, Goofy, Donald, Pluto, etc.). These characters have aided in Walt Disney’s
ability to capitalize and have a definitive grasp upon their target consumers of children.

However, Disney’s largest asset is their ability to stay diversified. Disney is a well-established
conglomerate firm with a solid domination within the theme park and entertainment industry.
Disney already operates through four different business segments which include media
networks, parks and resorts, studio entertainment, and consumer products. Disney’s
monumental deal with Apple creating a partnership between Disney and iTunes should provide
an excellent resource to further push the brand and provide a reputable channel to push
product distribution. Overall, Disney’s desire to strive for excellence, ability to adapt to change,
and continuing to keep the consumers as the driving force behind the enterprise make Disney
an empire within the media industry.
Being a conglomerate of this capacity, the Walt Disney Company holds exceptionally
high sunk costs which could hinder Disney’s future financial abilities. In addition to sunk costs,
there is the continual cost of updating all the parks, resorts, hotels, cruise ships, etc. Disney’s
brand of “quality” must be maintained nonetheless it continues to escalate the costs. Although
merchandise aimed at the children segment is a huge market, such a public image can have a
“kiddie-stigma” attached to the Disney brand name which could deter the young adult
segment. Although Disney is attempting to increase its Internet presence, it cannot compete
with the popularity of properties such as Google.com, Youtube.com, and Facebook.com, which
are either owned or have lucrative deals with Disney’s top competitors Time Warner, CBS
Corporation, and News Corporation (Hoover’s).
Disney has many opportunities to continue the firm’s growth within the industry.
Currently the markets are much more versatile to outsourcing and globalization. The Walt
Disney Company is working towards this global localization through expansion into Europe and
Asia. Approximately twenty-five percent of Disney’s operating income comes from outside the
United States and Canada, making continued growth internationally a major competitive
advantage. Disney has invested tremendously in their Research and Development department,
which projects progressive new attractions to pull in consumers. Disney’s ability to re-invent


and create limited edition products allows multiple opportunities for sales with new or
improved merchandise.
Disney has multiple threats that could negatively impact its profitability in the future.
Disney’s major threat comes from its competitors on national, regional, and global platforms.
The high competition and growth of other industry giants pose multiple problems to Disney’s
ability to sustain as a leader within the industry. With the recent acquisition of Marvel and
other businesses, Disney’s hasty acquisitions could post low or unprofitable sales, resulting in
not only a loss, but a negative impact for the conglomerate’s brand name. Another threat is
Disney’s high pressure and demand in terms of sales, creativity, and innovation while
maintaining its quality status. Finally, due to the recent economic state, employee retention
can pose a threat if employees are let go and work for competitors within the industry.
Disney would fall under the “Entertainment – Diversified” industry category as a service
sector. News Corp., Time Warner Inc., Liberty Media Interactive, Liberty Capital Group, and
Liberty Starz Group are the Walt Disney Company’s main competitors within this industry. Even
though the Walt Disney Company is a market leader, these other competitors can pose
definitive difficulties because they are all diversified conglomerates with a solid presence within
the global market.
Growth Potential:
Overall, the Walt Disney Company is poised very well for the future. The successful
leadership of Bob Iger is particularly important to the continued success of the firm. As the
leader, Iger does not assume autonomous control, but puts a great deal of trust in his
associates and top level executives, creating an extraordinary working atmosphere. Iger’s deal
with Apple’s Steven Jobs should provide a huge opportunity for growth with this significant
partnership. Disney has a long successful history while still being able to adapt with the
changes within the industry. Under the current leadership, Disney is already a growing part of
the new environment of digital media.


Financial Planning and Analysis
Liquidity Ratios
The Walt Disney Company
Time Warner Inc.
Current Ratio (MRQ)
Quick Ratio (MRQ)
(Data for the liquidity ratios was taken from Reuters.com)


The current ratio measures the company’s ability to pay its short-term obligations. The
ratio is mostly used to give an idea of how well a company can pay back its short-term liabilities
with its short-term assets. The Walt Disney Company current ratio of 1.11 is greater than 1,
which means their assets can cover their liabilities. However, the Walt Disney Company is
below both the Industry and its competitor, Time Warner Inc.
The quick ratio (acid test ratio) measures a company’s ability to meet its short-term
obligations with its most liquid assets. The quick ratio is a more conservation method to
measure liquidity over the current ratio because it excludes the inventory from the current
assets. If a firm needed had to pay off its short-term obligations immediately, there are
occurrences where the current ratio would overestimate a company’s short-term financial
strength. The Walt Disney Company quick ratio is 1.01 versus Time Warner’s 1.28. This shows
that Disney actually holds less inventory than Time Warner (9% versus 13%), and Disney’s quick
ratio is actually less than the industry average as well.
Leverage Ratios

The Walt Disney Company

Total Debt to Equity (MRQ)
Times Interest Earned (Interest Coverage)
(Data for the leverage ratios was taken from Reuters.com)

Time Warner




The debt to equity ratio indicates what proportion of equity and debt the company is
using to finance its assets. The Walt Disney Company has a low total debt to equity with only
38.23% of their assets are financed with their liabilities. Disney’s total debt to equity is lower
than both Time Warner and the Industry average. This implies, relative to the industry, the
Walt Disney Company takes a less aggressive method to finance its growth with its debt,
reducing its risk as a company.


Times Interest Earned is a measure of the firm’s ability to meet its debt obligations
through interest payments. Time Warner’s negative time interest earned implies that they
cannot cover their debt; whereas Disney does not have a time interest earned ratio was
missing. After calculating Disney’s time interest earned from their 10K, they have a
substantially higher ratio indicting it can meet its debt obligations seven times over.
Assets Management Ratios The Walt Disney Company
Inventory Turnover (TTM)
Receivable Turnover (TTM)
Average Collection Period
60.73 days
Total Asset Turnover (TTM)
(Data for the leverage ratios was taken from Reuters.com)

Time Warner
74.95 days

73.44 days

The inventory turnover illustrates how often a firm’s inventory is sold and replaced over
a period. Since inventory is typically the least liquid form of an asset, a high ratio implies strong
sales and effective buying. The Walt Disney Company dominates in terms of inventory turnover
with a higher turnover than both the industry average as well as Time Warner.
The receivable turnover ratio and the average collection period are used to calculate a
company’s effectiveness in extending credit as well as collecting debts. The receivables
turnover ratio measures how efficiently a firm uses its assets. The average collection period is
stated in terms of the number of days that credit sales remain in the accounts receivable before
they are collected. Disney has both a better receivable turnover and average collection period,
implying that Disney is working efficiently at collecting their accounts receivables as well as
effectively using their assets.
The total asset turnover is the amount of sales generated for every dollar’s worth of
assets, the higher the number the better. Although Disney is doing better than Time Warner, it
is still slightly under the industry average, this implies that Disney can do more to enhance
Disney’s ability to efficiently use its assets to produce sales or revenue.
Profitability Ratios
The Walt Disney Company
Return on Assets (TTM)
Return On Equity (TTM)
Net Profit Margin (TTM)
(Data for the leverage ratios was taken from Reuters.com)

Time Warner



The Walt Disney Company has average to below average profitability ratios. The return
on assets (ROA) indicates how profitable a firm is relative to its total assets. The ROA aids in
determining how efficient management is at using the assets it has to generate additional
earnings. The return on equity (ROE) measures a company’s profitability by showing how much
profit a firm makes with the money the actual shareholders have invested. Although Disney’s
ROA and ROE is better than Time Warner, it is still slightly below the industry average’s ROA
and ROE.
The net profit margin indicates how much of every dollar of sales the company keeps in
earnings. Disney’s 9.93% means that the company has a net income of approximately $0.10 for
each dollar of sales. Disney’s profit margin is greater than Time Warner’s, indicating that they
have a higher level of earnings compare to its competitor.
Market Value Ratios
P/E Ratio (TTM)
Price to Book Ratio (MRQ)

The Walt Disney Company

Time Warner


(Data for the leverage ratios was taken from Reuters.com)
The price earnings ratio indicated the company’s current share price compared to its
per-share earnings. Since Disney’s P/E ratio is higher than both Time Warner and the industry,
this implies that shareholders are expecting higher earnings growth in the future. The price to
book ratio compares a stock’s market value to its book value. Disney is very close to the
industry’s average so this seems to be valued correctly, however one must be aware that this
could vary by industry.


DuPont Identity
The breakdown of the DuPont identity is meant to show the effects of operating efficiency
(PM), asset use efficiency (TATO), and financial leverage (EM). If ROE is unsatisfactory, the
DuPont identity helps locate the part of the business that is underperforming.


Disney 2009

= .0915*.5727*1.87 = 9.80%

Disney 2008

= .1171*.6050*1.93 = 13.70%

Disney 2007

= .1320*.5828*1.98 = 15.24%

Time Warner 2009

= .0946*.3923*1.97 = 7.30%

Time Warner 2008

= -.4581*.2237*2.70 = -28.70%

Time Warner 2007

= .1583*.1959*2.29 = 7.10%

These ROE’s will differs from the one listed previously from Reuters.com due to the site using TTM (trailing twelve months), which is more upto-date and accurate. The table is calculated out is derived from the balance sheet and income statement from Google Finance.

Company Comparison: DuPont Identity 2007-2009
Walt Disney Company
Time Warner
2009 ROE
9.80 %
2008 ROE
2007 ROE
The table is calculated out and derived from the balance sheet and income statement for The Walt Disney Company and Time Warner from
Google Finance.

The return on equity shows how well a firm uses investment funds to generate earnings
growth. The Walt Disney Company’s return on equity and net income has steadily decreased
since 2007, whereas the profit margin has steadily increased. With Time Warner’s ROE’s lower
values against Disney it could imply that it is slightly a more conservative firm. Disney’s
decreasing profit margin could mean it is not controlling costs as well as it previously was, its
profit margin has decreased due to Disney’s net income decline. In terms of total asset
turnover, Disney is also better than Time Warner which means Disney manages its assets in a
more efficient manner against Time Warner. In 2008, Time Warner’s net income was in the


negative which lead to a negative return on equity; this is due to a seven billion dollar unusual
expense and a backlash from consumers which lead to damaging publicity.
Growth Rates – 2009



The internal growth rate is the highest level of growth achievable for a firm without
obtaining outside financing. The growth rate calculated for the Walt Disney Company is 4.44%.
Historically, the Walt Disney Company saw internal growth rates of 6.14% and 7.36% for 2008
and 2007 respectively. This continuing decline could be a result of the dismal economy.
However, with the acquisition of Marvel Entertainment, along with new and profitable feature
films, the Walt Disney Company can still attain a positive internal growth rate.
The sustainable growth rate is how much the firm can grow by using internally
generated funds and issuing debt to maintain a constant debt ratio. The Walt Disney
Company’s sustainable growth rate is 8.42%. Historically, the Walt Disney Company saw
sustainable growth rates of 12.57% and 15.66% for 2008 and 2007 respectively. Again, a
depressed economy is probably the main culprit notwithstanding, the Walt Disney Company
strong management team can expect to see sustainable growth. Additionally, analysts on Value
Line have forecasted double-digit growth during the next fiscal year.


Dividend Growth Model
Estimated Growth Rate in Earnings and Dividends/Required Rate of Return
Dividend Discount Model (Data from Value Line Publishing)

r = 11.92%
The data from Value Line Publishing listed a historical dividend growth rate of 10.0% for the
Walt Disney Company and estimated the firm’s dividend growth rate to be 11.5% until 2014. I
chose to take the average between these two growth rates to give a more accurate depiction of
the potential growth rate which is why 10.75% was used in the above equation. The final
calculation shows that the required rate of return is 11.92%. This number is rational because
11.92% is larger than the 10.75% estimated divided growth rate, and actually closer to the
11.5% estimated dividend growth rate. According to Value Line Publishing’s data given
according to historical rates and calculating the required rate of return, it is safe to believe the
Walt Disney Company has a stable constant growth. This stability is because Walt Disney has
been growing at a stable rate for over five years.


Capital Asset Pricing Model (CAPM)
Estimates of Beta
Google Finance: 1.17

Value Line: 1.00

Reuters: 1.15

S&P: 1.10

Average: 1.105

The table above lists the beta estimates from four sites along with the average beta
between Google, Value Line, Reuters, and S&P. The beta of a stock is a number that describes
the relation of returns with that of the financial markets as a whole. Since the Walt Disney
Company’s beta is almost exactly 1, the company has about as much systematic risk as
expected against the overall market. Beta is pivotal in the capital asset pricing model because it
measures the part of the asset’s statistical variance that cannot be diminished by the
diversification of the firm, since it is correlated with the return of the other assets within the
Expected Return Using CAPM

CAPM = .09397 = 9.397%

The current risk free interest rate for three-month Treasury bills is .115% as of April 1st,
2010. According to Chapter 9 in the textbook, the historical risk premium rate relative to the
Treasury bills for large-company stocks is 8.4%. Using these two figures, along with the average
beta calculated above, the calculated expected return is 9.397% using CAPM. The required rate
of return that was calculated using the dividend discount model was 11.92% which is
approximately 2.5% higher than the CAPM rate calculated. This is due to a difference with how
beta is estimated which could be smaller than the actual beta. With the currently weak
economy, the low interest yield for Treasury bills may have made the estimate appear lower.
CAPM is a more accurate measure of return due to the fact that the 11.92% return was still
higher than both the historical and future rates given on Value Line. CAPM is also more
accurate because it uses actual current market numbers decreasing the use of estimates used
within the dividend discount model approach.

Weighted Average Cost of Capital (WACC)
The weighted average cost of capital formula is:

The Walt Disney Company’s capital structure is as follows:
Debt (B)
Book Value (Long Term Debt):
Equity (S)
Stock Price:
Market Value:
Total Value of the Firm (B+S):
The remaining components of the WACC equation come from the following:
Tax Rate (2009) (
Tax Expense
Net Income before Taxes
Tax Expense/Net Income before Taxes
Cost of Debt
Cost of Equity ( ) (CAPM)




After collecting all the information above, the Walt Disney Company’s weight in bonds is
17.41% (11,495/66,007.634) and their weight in stocks is 82.59% (54,512.634/66,007.634).
According to marketwatch.com, the Walt Disney Company has multiple different bonds with
yield to maturities of 0.537, 1.224, 1.257, 1.723, 2.405, 2.860, 3.607, 4.125, and 4.009. I
averaged all nine yield to maturities to find the average of 2.416%. The tax rate for the Walt
Disney Company was calculated using Google Finance’s Income Statements. After estimating
the tax rate, using the CAPM as the cost of equity, and determining the cost of debt I calculated
that the weighted average cost of capital (WACC) to be 5.22%. WACC may not be a sensible
discount rate for all of the Walt Disney Company’s capital budgeting projects since the Walt
Disney Company is so diversified with multiple companies within the conglomerate. The Walt

Disney Company generates revenues through five main segments: Media Networks (44.8%),
Parks and Resorts (29.5%), Studio Entertainment (17.0%), Consumer Products (6.7%), and
Interactive Media (2.0%). The media networks division may be able to take on greater risks due
to the constant need for research and development required in this industry. The parks and
resorts division also requires more capital due to constant updates with operating expenses
and research and development. For all these reasons, the Walt Disney Company may need
different discount rate for each division to more accurately determine the breakdown of debt
and equity.


Estimating Walt Disney Company’s Value
Estimated Free Cash Flows
Investment in Net Working Capital


Current Assets

Current Liabilities
















$ (77)





$ (648)






(All dollar amounts in Millions of USD taken from Google Finance)




after Tax


Investment in Fixed

Investment in
Working Capital

Free Cash



















(All dollar amounts in Millions of USD taken from Google Finance)
Profit after tax and depreciation were taken directly from the Google finance statement of cash
flows. The investment in fixed assets was calculated using the difference between the PPE
previous year and current year. The investment in working capital was calculated by taking the
difference between the net working capital of the previous year and current year. Finally the
free cash flows column was calculated using the formula listed between the tables.



Estimated Growth in Free Cash Flows
Free Cash Flows
Growth Rate in Free Cash Flows
Δ Free Cash Flows

















The free cash flows was taken from the table listed above. The change in free cash flows is
derived from calculating the previous year’s free cash flows from the current free cash flows.
The growth in free cash flows is calculated by dividing the current year’s change in free cash
flows over the previous year’s free cash flows.
According to the data above, the Walt Disney Company’s growth rates have steadily
decreased since 2007. In 2009 the growth rate dropped dramatically most likely due to the
acquisition of the Marvel Company. It is probable that the growth rate should begin to increase
as the Walt Disney Company begins to experience profits from the investments and
development from the purchase of Marvel. With the vast differences in these three growth
rates in free cash flows, it is not practicable to calculated rates or even an average of the
growth rates. The use of Value Line’s estimated cash flow rate of 10.5% is better because it
uses more historical data which will give a more practical growth expectation for the Walt
Disney Company.
Estimated Value per Share
As stated above, my initial plan was to use Value Line’s estimate cash flow rate of 10.5%
and the Weighted Average Cost of Capital of 5.22%. Unfortunately the growth rate is larger
than my WACC so the rate is not applicable. I will use the two-step approach, where the longterm growth rate at the horizon is smaller than the calculated weighted average cost of capital.
Through analysis of the growth rates of the free cash flow’s that were previously calculated, I
expect that the Walt Disney Company’s acquisition of Marvel Entertainment will return to a
standard rate in four to five years. I will assume that at the start of the fourth year the growth
rate will drop to 5.0% from 10.5%, I chose this rate because it is slightly less than half the
growth rate from the previous Value Line estimate, and is still twice as high as the inflation rate.
I derived the inflation rate from the US Inflation Calculate which determined that the average

rate for 2010 was 2.35% (2.6 in January and 2.1 in February). The Walt Disney Company is a
strong and consistent conglomerate so I believe it will be growing by more than the inflation
Forecasted Free Cash Flow @ 5.0% Growth Rate
PV of Cash Flow 3(Horizon Value) =


1,051.12 * (1.05)/(0.0522 – 0.050)
Present Value of Business
CF0 = FCF 0
CF 1= FCF 1 = FCF0*(1.05) =
CF 2 = FCF 2 = FCF1*(1.05) =
FCF 3 = FCF2*(1.05) =
CF 3 = FCF 3 +Horizon Value =


$ 908.00
$ 953.40

Value per Share (VPS) =
Long Term Debt =
Preferred Stock =
# of Shares Outstanding =
My estimated stock price of $232.39 is $202.41 more than the stock price of $29.98
which was listed on Value Line. This inconsistency in prices could have been caused for a
number of reasons. The estimates for the FCF growth rates were difficult to estimate because
of the Walt Disney Company’s varied free cash flows. Also throughout this project, multiple
estimates were made to complete calculations, including estimates for the Weighted Average
Cost of Capital. These figures are rather arbitrary; however I would still invest in the Walt
Disney Company. There are numerous reasons to consider when determining whether a stock
is a good investment, not just whether the free cash flows are positive. The Walt Disney
Company continues to build shareholder’s wealth through making intelligent acquisitions and
sustaining a competitive advantage within the industry. The Walt Disney Company is a wellestablished conglomerate which continues to be an industry leader; I would invest in the Walt
Disney Company because it has proven that it will continue to be successful and profitable in
the ever-changing industry.

Sanders, Adrien-Luc. “The Walt Disney Company.” About.com Guide. 30 March 2010.
Hoovers Inc. “The Walt Disney Company.” 30 March 2010.


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