Key to Exam I; F4360; 10:00 Class; Spring, 2000; page 1 of 2
Use the information contained in the following footnotes and financial statements to answer the next 2 questions.
Short answer questions/problems
1. Calculate Disney’s Net Profit Margin for 1999.
1300
.0555 
23,402
2. Calculate Disney’s PE ratio for 1999.
25,125
25,125
39.88 
or 40.52 
0.63
0.62
3. Calculate Disney’s Current Ratio for 1999.
10,200
1.323 
7707
4. Without doing any calculations, briefly discuss whether and why you think Disney’s quick ratio would reveal
much about Disney’s short-term solvency beyond what is revealed by its current ratio.
It will not since Disney has so little inventory.
5. To what can we compare Disney’s average collection period to determine whether there is a potential problem
with Disney’s collections of receivables?
Credit terms [+4], trend of company’s ACP [+3], industry average [+1]. Note: [+2 for any of the answers]
6. Assume you want to determine Disney’s weighted average of capital so that you can calculate Disney's EVA for
1999. What would you use for Disney’s cost of equity capital?
10.62 = 4.98 + .94(6)
For questions 7, 8, and 9 briefly discuss how Stern Stewart recommends that the following items be treated
differently when calculating EVA than they are treated for accounting purposes.
7. Inventory
Convert to FIFO if LIFO (or add change if LIFO provision to NOPAT and LIFO provision to inventory)
8. Research and Development Expense
Capitalize then amortize rather than expense.
9. Marketable Securities
Ignore for EVA
10. Give two reasons Stern Stewart gives for why EVA is a better measure of performance than accounting net
income.
Two of: includes cost of equity capital, converts to cash flow from accrual, removes conservative bias in
accounting statements, adjusts to reflect ongoing operations, leverage doesn’t affect the capital charge used
to calculate EVA.
Key to Exam I; F4360; 10:00 Class; Spring, 2000; page 2 of 2
Problems/Essays
1. Assume that Disney’s weighted average cost of capital is 9.97%. Calculate the capital charge used to determine
Disney’s EVA for 1999.
Operating cash
plus: Receivables
Inventory
Other Current Assets
Plant & Equipment
Intangible Assets
Capitalized R&D
Other Assets
less: Current liabilities
Capital
127
3999
899
3887
10,346
16,940
0
4049
- 5402
34,845
[+4]
[+4]
[+4]
= 3223 [+3] + 664 [+3]
[+4]
= 15,787 [+3] + 1153 [+3]
[+4]
= 2506 [+3] + 1543 [+3]
=4767 [+3] + 635 [+3]
Capital charge = 3474.05 [+2] = 34,845 x .0997 [+4]
2. Suppose you are interested in determining whether Disney has too much debt.
Note on grading of #2. The numbers in brackets represent the number of “checks” possible for each concept.
Use the scale at the bottom to convert to points out of 50 possible.
a. Which ratios would you calculate? Debt ratio [4], interest coverage ratio [4]
b. Calculate these ratios for 1999.
Debt Ratio  .51979 
43,679  20,975 
43,679
Interest Coverage Ratio  4.78105 
[8]
2314  612
[8]
612
c. How would you go about using your numbers in part b to figure out whether Disney has too much debt?
Debt ratio above [2] industry averages [4] and to a lesser extent above [1] own historical debt ratios [2]
Interest coverage ratio less than [2] 1.0 [4] (which it is [2]) and to a lesser extent less than [1] the industry
average [2] and less than [1] own historical interest coverage ratios [2]
Scale [checks = points]: 42=50, 39-40=49, 38=48, 36=47, 35=46, 34=45, 33=44, 32=43, 31=42, 30=41, 29=40,
28=39, 27=38, 26=37, 24=36, 20-22=35, 17-18=34, 15-16=33, 13-14=32, 10-12=31, 7-8=30, 4=28, 3=27,
2=25
Market Based Information on Disney:
Closing price for Disney stock: $25.125 on September 30, 1999, $25.375 on September 30, 1998
Disney’s Beta was 0.99 as of September 30, 1999 and 0.94 as of September 30, 1998
Return on 30-year Treasury Strip: 6.06% as of September 30, 1999 and 4.98% as of September 30, 1998
Information from Footnotes for Disney:
Note 1: Investments includes debt securities and equity investments. The Company's
share of earnings or losses in its equity investments is included in "Corporate and
other activities" in the Consolidated Statements of Income.
Note 10: Detail of Certain Balance Sheet Accounts
1999
1998
-------------------------------------------------------------Current receivables
Trade, net of allowances
Other
Other current assets
Prepaid expenses
Other
$ 3,160
473
------$ 3,633
=======
$ 3,447
552
------$ 3,999
=======
$
$
515
164
------$
679
=======
Intangible assets
Cost in excess of ABC's net assets acquired $14,248
Trademark
1,100
FCC licenses
1,100
Other
856
Accumulated amortization
(1,609)
------$15,695
=======
483
181
------$
664
=======
$14,248
1,100
1,100
492
(1,153)
------$15,787
=======
The Walt Disney Company
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Year Ended September 30
1999
1998
1997
----------------------------------------------------------------------------Revenues
Costs and expenses
Amortization of intangible assets
Restructuring charges
Gain on sale of Starwave
Gain on sale of KCAL
Operating income
Corporate and other activities
Equity in Infoseek loss
Net interest expense
Income before income taxes
Income taxes
Net income
Earnings per share
Diluted
Basic
Average number of common and common equivalent
shares outstanding
Diluted
Basic
$ 23,402
(19,715)
(456)
(132)
345
--------3,444
(196)
(322)
(612)
-------2,314
(1,014)
-------$ 1,300
========
$ 22,976
(18,466)
(431)
(64)
---------4,015
(236)
-(622)
-------3,157
(1,307)
-------$ 1,850
========
$ 22,473
(17,722)
(439)
--135
-------4,447
(367)
-(693)
-------3,387
(1,421)
-------$ 1,966
========
$
0.62
========
$
0.63
========
$
0.89
========
$
0.91
========
$
0.95
========
$
0.97
========
2,083
========
2,056
========
2,079
========
2,037
========
2,060
========
2,021
========
The Walt Disney Company
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30
1999
1998
---------------------------------------------------------------------------ASSETS
Current Assets
$
414 $
127
Cash and cash equivalents
Receivables
3,633
3,999
Inventories
796
899
Film and television costs
4,071
3,223
Deferred income taxes
607
463
Other assets
679
664
------- ------Total current assets
10,200
9,375
Film and television costs
2,489
2,506
Investments
2,434
1,821
Theme parks, resorts and other property, at cost
Attractions, buildings and equipment
15,869
14,037
Accumulated depreciation
(6,220) (5,382)
------- ------9,649
8,655
Projects in progress
1,272
1,280
Land
425
411
------- ------11,346
10,346
Intangible assets, net
15,695
15,787
Other assets
1,515
1,543
------- ------$43,679 $41,378
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable and other accrued liabilities $ 4,588
Current portion of borrowings
2,415
Unearned royalties and other advances
704
------Total current liabilities
7,707
Borrowings
9,278
Deferred income taxes
2,660
Other long term liabilities, unearned royalties and other
advances
3,059
Stockholders' Equity
Preferred stock, $0.01 par value
Authorized--100 million shares
Issued--none
Common stock, $0.01 par value
9,324
Authorized--3.6 billion shares
Issued--2.1 billion shares
Retained earnings
12,281
Cumulative translation and other
(25)
------21,580
Treasury stock, at cost, 29 million shares
(605)
Shares held by TWDC Stock Compensation Fund, at cost-0.4 million shares as of September 30, 1998
-------20,975
------$43,679
=======
$ 4,767
2,123
635
------7,525
9,562
2,488
2,415
8,995
10,981
13
------19,989
(593)
(8)
------19,388
------$41,378
=======
The Walt Disney Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended September 30
1999
1998
1997
------------------------------------------------------------------------------NET INCOME
$ 1,300 $1,850 $1,966
ITEMS NOT REQUIRING CASH OUTLAYS
Amortization of film and television costs
2,472
2,514
1,995
Depreciation
851
809
738
Amortization of intangible assets
456
431
439
Gain on sale of Starwave
(345)
--Equity in Infoseek loss
322
--Gain on sale of KCAL
--(135)
Other
80
31
(15)
CHANGES IN
Receivables
376
(664)
(177)
Inventories
103
(46)
8
Other assets
(165)
73
(441)
Accounts and taxes payable and other accrued
liabilities
477
218
608
Film and television costs television broadcast rights
(319)
(447)
(179)
Deferred income taxes
(20)
346
292
------- ------ -----4,288
3,265
3,133
------- ------ -----CASH PROVIDED BY OPERATIONS
5,588
5,115
5,099
------- ------ -----INVESTING ACTIVITIES
Film and television costs
(3,020) (3,335) (3,089)
Investments in theme parks, resorts and other
property
(2,134) (2,314) (1,922)
Acquisitions (net of cash acquired)
(319)
(213)
(180)
Proceeds from sale of investments
202
238
31
Purchases of investments
(39)
(13)
(56)
Investment in and loan to E| Entertainment
-(28)
(321)
Proceeds from disposal of publishing operations
--1,214
Proceeds from disposal of KCAL
--387
------- ------ -----(5,310) (5,665) (3,936)
------- ------ -----FINANCING ACTIVITIES
Change in commercial paper borrowings
(451)
308 (2,088)
Other borrowings
2,306
1,522
2,437
Reduction of borrowings
(2,031) (1,212) (1,990)
Repurchases of common stock
(19)
(30)
(633)
Exercise of stock options and other
204
184
180
Dividends
-(412)
(342)
Proceeds from formation of REITs
--1,312
------- ------ -----9
360 (1,124)
------- ------ -----Increase (Decrease) in Cash and Cash Equivalents
287
(190)
39
Cash and Cash Equivalents, Beginning of Year
127
317
278
------- ------ -----Cash and Cash Equivalents, End of Year
$
414 $ 127 $ 317
======= ====== ======
Supplemental disclosure of cash flow information:
Interest paid
$
575 $ 555 $ 777
Income taxes paid
$
721 $1,107 $ 958
======= ====== ======