This is a corporate financial analysis of Disney. I do not expect you or want you to replicate this analysis, but you can use it to get a sense of how I would answer the project questions. In doing this analysis, I was constrained because I was looking at only one firm. If you are as a group looking at a number of firms, I would strongly recommend that you try to integrate your analysis. (In other words, doing separate reports for each company is not only repetitive, but it also robs you of some interesting comparisons that you can make across these companies.) For instance, in the first part, when I have a graph on corporate governance and show Disney alone, you could show more than one firm on the same graph. In other parts, where I have tables that compare Disney to the entertainment industry, expand the tables to include all your firms. In the discussion parts, focus not only on what is unique about your firm but also on what it has in common with other companies in the group.
California-based Walt Disney Company (DIS or the Company) is a diversified media and entertainment company with four primary business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive Media. Each segment consists of integrated, well-connected businesses that operate in concert to maximize exposure and growth worldwide. Since its foundation in 1923, The Walt Disney Company is committed to produce rewarding entertainment experiences based on its rich legacy of quality creative content and storytelling. More information on the Company is available at its website: www.disney.com.The analysts identified the following issues as critical to an evaluation of the investment merits of DIS:Key Positive ArgumentsKey Negative ArgumentsStrong Management Team - Management has shown a strong ability to identify and develop new entertainment franchises and to effectively distribute those franchises across multiple platforms in domestic and international markets.Growth Initiatives DIS has undertaken several growth initiatives, such as increasing Internet presence, expansion of international cable network and Theme Parks, investment in gaming, and increase of content revenue through new media channels.ESPN's Dominant Position in Sports: ESPN holds a dominant position in sports. ESPN carriage agreements with large cable, satellite, and telco distribution partners are largely locked in through 2012. Moreover, the analysts expect ESPN to continue to be the key revenue and operating income performance driver in Disney's cable segment and for the Company overall.Marvel Acquisition: This acquisition is strategically designed to help Disney to re-accelerate growth in the long term. Marvel further diversifies Disney's licensing revenue, housed in the Consumer Products segment.High Advertising Exposure DIS generates a large percentage of its revenue from advertising. If there is a material decline in ad revenue, DIS's results and investor enthusiasm may be dampened.Unpredictability - The Entertainment business is inherently difficult to predict, and an underperforming film slate could adversely affect earnings.Growth in piracy - DIS business depends heavily on the protection of its intellectual property. A significant growth in the distribution of the Company's intellectual property by others without proper authorization or compensation (piracy) could materially affect the Company's operating results.Park Discounts Occupancy rates look to be getting incrementally worse, which may prompt DIS to increase promotional activity to sustain attendance momentum.Note: DIS's fiscal year ends on September 30 fiscal references do not coincide with the calendar year.
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Finally, there will be parts of this analysis where you will have more information or less information than I do, or where the information you have from different sources is not consistent. Work with what you have. Be creative, be bold and do not let yourself be constrained by conventional wisdom. Above all, have fun. I appreciate the effort .
I. Corporate Governance Analysis
A. Management and Stockholders
Balance of Power:
At Disney, the power clearly resides with the incumbent management, and in particular, with the CEO, Mr. Michael Eisner. This power emanates not from any stockholdings that Mr. Eisner and other top managers have - they own less than 1% of the outstanding stock - but from the fact that the board of directors is composed almost entirely of insiders and people who are close to Mr. Eisner. (See Exhibit 1 for a listing of the directors, and their relationships to Mr. Eisner or Disney.) Note that
Insiders (Current or Former executives at Disney) hold seven of the seventeen positions on the board.
Of the remaining ten, quite a few have other connections with Mr. Eisner. For instance, Mr. Irwin Russell happens to be Mr. Eisner’s personal attorney, and Ms. Bowers, the principal of the school that Mr. Eisner’s child attends.
It is interesting that both Calpers and Fortune, with different ranking mechanisms, ranked Disney’s board at the very bottom of their lists in terms of effectiveness, and independence from incumbent management.
Management power is accentuated by the fact that the stockholdings in Disney are dispersed widely, making it difficult for any one stockholder to exert pressure on managers to change their ways.
Source: Annual report; Fortune Magazine Rankings of Corporate Boards; New York Times Story on Calpers
Manifestations
The power of incumbent managment comes through in a variety of ways. In particular,
The top managers of the firm have been compensated extraordinarily well in the last few years. In the most recent year, for instance, Mr. Eisner earned $8.25 million in salary and bonus. Over the last 5 years, his total compensation from Disney has amounted to $ 235.95 million. In addition, has received more than 8 million options from the firm over the period. (See Exhibit 2 for the compensation breakdown)
When Disney parted ways with Mr. Michael Ovitz in 1996, and had to pay a substantial price (estimated to be $90-100 million) to do so, the board essentially absolved Mr. Eisner of all responsibility, even though he had brought Mr. Ovitz into the firm, and their failure to get along precipitated Mr. Ovitz’s departure.
Source: Forbes.com/ceo for CEO compensation; WSJ story on Mr. Ovitz
Project Suggestion: If you are analyzing a foreign company, you might not be able to find much information on who sits on the board of directors or how much managers are paid. As a rule of thumb, the less information there is available on these matters, the more likely it is that stockholders have little or no control over the incumbent managers of the firm.
Managerial Performance
It has to be noted, in management’s favor, that Disney’s earnings and stock price performance during this period were stellar. Disney’s earnings increased from $ 816 million in 1992 to $ 1533 million in 1997, and its stock price increased from $ 35 in 1992 to $ 75.38 in June 1997. On both measures, Disney did better than other firms in the market.
Stockholder Reaction
Stockholder reaction in the early years was muted to the power that resided with incumbent management and the efforts of Mr. Eisner to stack the board. The sheer magnitude of Mr. Eisner’s compensation, and the failure of the board to hold him accountable for his actions, has lead to an increase in stockholder activism. This activism has manifested itself in the last year in the form of significant no votes on re-electing the board and as challenges to incumbent managers.
Source: WSJ report on Disney Annual Meeting
B. Firm and Financial Markets
Disney is a well-followed firm. Zacks reports at least 24 sell-side analysts who have made buy, sell or hold recommendations on the firm, providing estimates of earnings per share and future growth. While the firm provides substantial amounts of information about itself in the form of earnings reports, there is a substantial amount of information that is available about the firm from external sources. Both facts would lead us to expect less bias in the information that is available about the firm.
Source: zacks.com
C. Firms and Society
Marvel Acquisition: This acquisition is strategically designed to help Disney to re-accelerate growth in the long term. Marvel further diversifies Disney's licensing revenue, housed in the Consumer Products segment.
Disney, as a family-friendly firm, which wants to appeal to the widest potential audience of customers, is clearly conscious of its image. In the last two years, it has been forced to make some tough choices. On the one hand, its desire to be seen as progressive and open has lead it to actions such as granting health benefits to same-sex partners of employees. At the same time, such actions have exposed it to criticism from religious groups that view these actions as a betrayal of the "family" image that Disney tries so hard to propagate. While the boycott announced by some of the latter has not hurt Disney financially yet, the mix of businesses that Disney is in (especially the movie and broadcasting divisions) are likely to create more hard choices in the future.
Disney has also come under criticism for using child labor and accepting unsafe working conditions in some of the factories at which its toys and clothes are made overseas. After one such expose on 20/20 (a show on ABC, owned by Disney), Disney chose to terminate its contract with the company named in the expose rather than risk the negative publicity.
Finally, the number of pages in Disney’s annual report that are dedicated to the social good that it does is a good indicator of how much of a role social concerns play in Disney’s day-to-day decision making.
Source: Annual report; Various news stories;
Project Suggestion: You will not find much information on this aspect of your firm unless your firm falls into one of the extremes — for example, the tobacco firms or Exxon, or at the other extreme, companies like Levi Strauss. You can check out the annual report, and you can see how the company has responded to public or social criticism.
II. Stockholder Composition
To analyze Disney’s stockholders, we began with an analysis of who the stockholders at the firm were at the end of last year. The pie chart breaks down the stock holdings in Disney into mutual funds, other institutional investors (pension funds), individual investors and insiders.
Source: Value Line CD-ROM
Most of these investors are still domestic investors, though they may be diversified into other markets. Finally, Disney’s stockholdings are fairly dispersed. The largest institutional investor, Investment Company of America, owns about 1.1% of the outstanding stock. The following table lists out the 10 largest stockholders in Disney.
Holder
Shares Owned
% of Disney
% of Fund
Investment Company of America
5505
1.10%
1.23%
Growth Fund of America
3852
0.77%
2.85%
Vanguard Index 500
3638
0.73%
0.83%
Fidelity Contrafund
2123
0.42%
0.61%
AMCAP Fund
2113
0.42%
4.12%
20th Century Ultra
1970
0.39%
0.84%
Sequoia
1561
0.31%
3.93%
Vanguard Institutional Index
1361
0.27%
0.82%
Fidelity Magellan
1300
0.26%
0.17%
Vanguard Windsor
1293
0.26%
0.58%
Source: Value Line
Note that Disney is not a disproportionate share of any of these fund’s total assets, suggesting that these funds are well diversified. In addition, a comparison of Disney’s insider and institutional holdings to the other entertainment firms suggests that Disney has far lower insider holdings and far greater institutional holdings than other companies in its peer group.
Disney
Other Entertainment Companies
Insider Holdings
3.50%
9.73%
Institutional Holdings
57%
37%
Source: Insider and Institutional Holdings Data set on my web site
Conclusions
In conclusion, these facts suggest that:
The average stockholder in Disney is a domestic institutional investor, more likely to be a pension fund than a mutual fund.
Since no stockholder is large enough to dominate the holdings, that the marginal stockholder is also likely to be a domestic institutional investor, again more likely to be a pension fund than a mutual fund.
Project Suggestion: The average stockholder may not always be the marginal stockholder. For instance, in a firm which has a significant insider holding (Microsoft, Dell etc.), the average investor may be the owner/manager of the company (Gates, Dell etc.), but the marginal investor (who is the investor who trades on a regular basis and sets prices) may be a large institutional investor or individual.
Park Discounts Occupancy rates look to be getting incrementally worse, which may prompt DIS to increase promotional activity to sustain attendance momentum.
III. Risk Profile
Overall Risk Profile
To analyze the risk profile for Disney, we begin with a plot of Disney monthly stock prices and quarterly earnings over the last 5 years. Both Disney’s stock prices and earnings have been on an upward path over the period, though there is considerable volatility in the stock prices, as evidenced by the standard deviation in stock prices, which was 21.26% on an annualized basis during this period.
Source: Bloomberg for prices over last 5 years and annual earnings per share.
A Market Analysis of Risk and Return
To analyze how much of this volatility can be attributed to market forces, we ran a regression of Disney stock prices against the S&P 500:
Source: Bloomberg Beta Page
In terms of the diagnostics on this regression, we concluded the following:
(a) Slope of the regression = 1.40. This is Disney's beta, based on returns from 1992 to 1996. Using a different time period for the regression or different return intervals (weekly or daily) for the same period can result in a different beta.
(b) Intercept of the regression = -0.01%. This is a measure of Disney's performance, when it is compared with Rf (1-b). The monthly risk-free rate (since the returns used in the regression are monthly returns) between 1992 and 1996 averaged 0.4%, resulting in the following estimate for the performance:
Rf (1-b) = 0.4% (1-1.40) = -0.16%
Intercept - Rf (1-b) =-0.01% - (-0.16%) = 0.15%
This analysis suggests that Disney performed 0.15% better than expected, when expectations are based on the CAPM, on a monthly basis between January 1992 and December 1996. This results in an annualized excess return of approximately 1.81%.
Annualized Excess Return = (1 + Monthly Excess Return)12 - 1
= 1.001512 -1 = 1.0181 - 1 = 0.0181 or 1.81%
By this measure of performance, Disney did slightly better than expected during the period of the regression. Note, however, that this does not imply that Dsiney would be a good investment looking forward. It also does not provide a breakdown of how much of this excess return can be attributed to ‘industry-wide’ effects, and how much is specific to the firm. To make that breakdown, the excess returns would have to be computed over the same period for other firms in the entertainment industry and compared with Disney’s excess return. The difference would be then attributable to firm-specific actions. In this case, for instance, the average annualized excess return on other entertainment firms between 1992 and 1996 was 3.5%, suggesting that the firm-specific component of performance for Disney is actually -1.7%. (Firm-specific Jensen’s alpha = 1.8% - 3.5%)
Source: The monthly riskfree rate can be obtained by adding up the T.Bill rates each year for the last 5 years (available in the Historical returns dataset on my web site), averaging them out, and then dividing by 5.For 1993-97, you can use 0.4% a month.
(c) R squared of the regression = 32.41%. This statistic suggests that 32.41% of the risk (variance) in Disney comes from market sources (interest rate risk, inflation risk etc.), and that the balance of 67.59% of the risk comes from firm-specific components. The latter risk should be diversifiable, and therefore unrewarded in the CAPM.
We also compared Disney’s regression statistics to those of the market over the same period, and came up with the following estimates:
Growth in piracy - DIS business depends heavily on the protection of its intellectual property. A significant growth in the distribution of the Company's intellectual property by others without proper authorization or compensation (piracy) could materially affect the Company's operating results.
Disney
Entertainment Companies
Beta
1.40
0.91
Jensen’s Alpha
1.81%
3.51%
R Squared of Regression
32%
47%
Source: Industry Regression Statistics (My web site/new stuff)
Disney seems riskier than the comparable firms, and has done less well these firms in recent periods. It also gets a smaller portion of its risk from market factors (which are not diversifiable).
Project Suggestion: If you are comparing these statistics across multiple companies, you can consign the scatter plot (from Bloomberg or your own regression to the end of the report, and focus on only the output from the regression in this part of the report. Thus, the table shown above for Disney and entertainment firms can be expanded to include the other companies that you are analyzing.
A Bottom-up Beta Estimate
While the regression of Disney on the S&P 500 suggests a beta of 1.40, I would be concerned about using this beta because of
the high standard error on the estimate (the standard error of 0.26 suggests a wide range for the true beta of Disney
the changing business mix of Disney over the period, with its acquisition of Cap Cities in 1995
the changing financial leverage at Disney over the period, with the $10 billion borrowed in 1995
To estimate a bottom-up beta for Disney, we broke it up into five different businesses and estimated the betas for each business based upon comparable firms. The table below provides the business mix, comparable firms used and the weights attached to each business:
Business
Estimated Value
Comparable Firms
Unlevered Beta
Division Weight
Weight*Beta
Creative Content
$ 22,167
Motion Picture and TV program producers
1.25
35.71%
0.4464
Retailing
$ 2,217
High End Specialty Retailers
1.5
3.57%
0.0536
Broadcasting
$ 18,842
TV Broadcasting companies
0.9
30.36%
0.2732
Theme Parks
$ 16,625
Theme Park and Entertainment Complexes
1.1
26.79%
0.2946
Real Estate
$ 2,217
REITs specializing in hotel and vacation properties
0.7
3.57%
0.0250
Firm
$ 62,068
100.00%
1.0929
In the first column, we list the businesses that Disney is involved in. In the second, we list the estimated value of each business to Disney, based upon the operating income (EBIT) of each business and an average multiple of EBIT (based upon comparable firms) for each business. In the third, we report the unlevered beta of comparable companies in each business, obtained by averaging out the betas of firms in each of the businesses and unlevering at their average debt/equity ratio. In the fourth column, we report the companies we used as comparable firms and in the last two columns we compute the weighted average beta. The unlevered beta, based upon the bottom-up calculation, for Disney is 1.09.
Project Suggestion: When estimating the bottom-up beta, try not to disaggregate too much or you will have trouble finding comparable firm betas. If your firm reports operating income by segment, use that to weight the unlevered betas. If not, use revenues.
To get Disney’s levered beta, we used the current estimated market values of equity and debt.
Market Value of Equity = Share Price * Number of Shares = 75.38 * 675.13 = 50.88 Billion
To get the market value of debt, we used the book value of debt of $ 12.342 billion, the interest expenses of $ 479 million and the face-value weighted average maturity of 3 years, in conjunction with a current cost of borrowing of 7.50% (see debt section below) to arrive at an estimated market value of debt of $ 11.18 billion.
Source: The face-value weighted maturity comes from the footnotes to the balance sheet.
Estimated Market Value of Debt =
Using these estimated market values for debt and equity, we estimated a debt/equity ratio of 21.97% for Disney as a company, and used it in conjunction with the bottom-up unlevered beta of 1.09 to estimate an unlevered beta of 1.25
Levered Beta for Disney = 1.09 ( 1 + (1-.36) (11.18/50.88)) = 1.25
Project Suggestion: When you have lots of bonds outstanding, aggregate the debt and interest expenses as we did for Disney, and compute the market value once rather than several times. If you have convertible debt which is traded, this same approach can be used to break the convertible debt into debt and equity components. With preferred stock, use the market value of the preferred and keep it as a separate component for the cost of capital, with the preferred yield being the cost of preferred stock. Finally, if you are going to capitalize operating leases, add the present value of these leases (at the cost of debt) to the market value of debt.
From Betas to Costs of Equity
To get from the beta to the cost of equity, we needed two other inputs. For the riskfree rate, we used a long term treasury bond rate (which at the time of the analysis was 7%). For the risk premium we will use the geometric historical risk premium for stocks over long term treasury bonds of 5.5%.
Expected Return = 7% + 1.25 (5.5%) = 13.85%
Using the expected return: This is the return that potential investors would require as a rate of return for investing in Disney stock, and it is also the cost of equity for Disney.
To estimate the levered beta by division, we used the same debt/equity ratio for all divisions except real estate, which raises its own debt based upon its properties.
Business
Unlevered Beta
D/E Ratio
Levered Beta
Riskfree Rate
Risk Premium
Cost of Equity
Creative Content
1.25
20.92%
1.42
7.00%
5.50%
14.80%
Retailing
1.50
20.92%
1.70
7.00%
5.50%
16.35%
Broadcasting
0.90
20.92%
1.02
7.00%
5.50%
12.61%
Theme Parks
1.11
20.92%
1.26
7.00%
5.50%
13.92%
Real Estate
0.70
50.00%
0.92
7.00%
5.50%
12.08%
Disney
1.09
21.97%
1.25
7.00%
5.50%
13.85%
Using the same riskfree rate of 7% (based upon the long term treasury bond rate) and a risk premium of 5.5% (based upon historical data) yields us the costs of equity by division.
Source: Use the latest long-term government bond rate as your riskless rate, and a 5.5% premium (if it is a US stock, or the country premium (based upon rating) if it is a foreign stock.
Disney’s Cost of Debt
To estimate Disney’s cost of debt, we obtained the current bond rating of the company. Standard and Poor’s assigns a rating of AA to Disney’s traded debt. Based upon the long term treasury bond rate of 7% and an estimated default spread of 0.50%, we estimate a pre-tax cost of borrowing of 7.50%. The after-tax cost of debt for Disney reflects the tax savings accruing to interest:
After-tax Cost of Debt = 7.50% (1 - .36) = 4.80%
We will also assume that all of Disney’s divisions face the same cost of borrowing.
Source: Bloomberg corporate bond page for Disney. If it does not exist, use a synthetic rating.
Project Suggestion: If your company has multiple bonds outstanding, it might also have multiple ratings. Use the rating on a recently issued straight bond. If you cannot find a rating, use the synthetic rating spreadsheet to estimate a rating. If you are capitalizing operating leases, be consistent, and treat these expenses like interest expenses.
Disney’s Weights for Debt and Equity
ESPN's Dominant Position in Sports: ESPN holds a dominant position in sports. ESPN carriage agreements with large cable, satellite, and telco distribution partners are largely locked in through 2012. Moreover, the analysts expect ESPN to continue to be the key revenue and operating income performance driver in Disney's cable segment and for the Company overall.
Using the market values of debt and equity, estimated earlier in the section on levered betas to be $ 50.88 billion for equity and $ 11.18 billion for debt, we estimate the following weights for debt and equity in the capital structure calculation:
Equity Ratio = 50.88/62.06 = 82%
Debt Ratio = 11.18 /62.06 = 18%
Disney’s Cost of Capital
Having estimated a cost of equity of 13.85% and an after-tax cost of debt of 4.80%, the cost of capital for Disney can be computed as follows:
Cost of Capital = 13.85% (0.82) + 4.80% (0.18) = 12.22%
The divisional costs of capital can also be estimated similarly, using the divisional costs of equity and the same debt ratio for all divisions except for real estate.
Business
E/(D+E)
Cost of Equity
D/(D+E)
After-tax Cost of Debt
Cost of Capital
Creative Content
82.70%
14.80%
17.30%
4.80%
13.07%
Retailing
82.70%
16.35%
17.30%
4.80%
14.36%
Broadcasting
82.70%
12.61%
17.30%
4.80%
11.26%
Theme Parks
82.70%
13.92%
17.30%
4.80%
12.32%
Real Estate
66.67%
12.08%
33.33%
4.80%
9.65%
Disney
81.99%
13.85%
18.01%
4.80%
12.22%
The costs of capital for the divisions range from a high of 14.36% for retailing to 9.65% for real estate.
Growth Initiatives DIS has undertaken several growth initiatives, such as increasing Internet presence, expansion of international cable network and Theme Parks, investment in gaming, and increase of content revenue through new media channels.
Relevance of Costs of Equity and Capital
The costs of equity and capital become hurdle rates for Disney as a company, with different rates applying for different divisions. In using these rates,
The cost of equity is the appropriate hurdle rate, when returns are measured to equity investors in the company. Thus, a new store has to earn a return on equity of more than 16.35% to be considered a good investment.
The cost of capital is the appropriate hurdle rate, when returns are measured to all investors in the firm (debt as well as equity). Thus, a new theme park will have to earn a return on all capital invested of greater than 12.22% to be considered a good investment
IV. Investment Return Analysis
A Typical Project
Given the diversity of Disney’s business mix, it is difficult to identify one typical project. Instead, we will identify the likely characteristics of projects in each of Disney’s divisions:
Business
Project Cash Flow Characteristics
Creative Content
Projects are likely to
be short term
have cash outflows are primarily in dollars (since Disney makes most of its movies and T.V programs in the U.S.) but cash inflows could have a substantial foreign currency component (because of overseas sales)
have net cash flows which are heavily driven by whether the movie or T.V series is a "hit", which is often difficult to predict.
Retailing
Projects are likely to be
1. medium term (tied to store life)
2. primarily in dollars (most of the stores are still in the United States)
3. cyclical
Broadcasting
Projects are likely to be
1. short term
2. primarily in dollars, though foreign component is growing
3. driven by advertising revenues and show success
Theme Parks
Projects are likely to be
very long term
primarily in dollars, but a significant proportion of revenues come from foreign tourists, who may be impacted by exchange rate movements.
affected by success of movie and broadcasting divisions.
Real Estate
Projects are likely to be
long term
primarily in dollars.
affected by real estate values in the area
Project Suggestion: This might be difficult to do for companies which do not have typical projects. Give it your best shot. If a firm has multiple divisions, try to look at each division separately.
A. Measuring Past Returns
To measure returns on Disney’s existing projects, we begin with a couple of assumptions. We assume that the current earnings of the firm are earnings attributable to existing projects. Consequently, we adjust earnings by adding back one-time charges and amortization of goodwill (on the Capital Cities acquisition). We also assume that the current book value of assets and equity reflect the current capital and equity invested in existing projects. Using the net income and book value of equity, we compute a return on equity of:
Return on Equity = Net Income1996 / Average BV of Equity for 1995 and 1996 = $2,836 million / $ 11,368 million = 24.95%
The average book value of equity was obtained by adding up the book values of equity for 1995 and 1996 and dividing by two.
Using the after-tax operating income and book value of capital, we estimate a return on capital of
Return on Capital = EBIT1996 (1-t)/ Average BV of Capital from 1995 to 1996 = $5,559 (1-.36)/ (19,031) = 18.69%
[Book value of capital = Book Value of Equity + Book Value of Debt; the average is obtained by summing up the book values for the two years and dividing by two.]
Both the net income and earnings before interest and taxes were cleansed of one-time charges and any extraordinary items.
Project Suggestion: For book value of equity, use only common equity. If your company’s book value of equity, do not compute the return on equity, since it is meaningless. You can also use the book value of equity and capital from the end of the last year to compute returns on equity and capital. The more your company has grown in the last year, the more I would be inclined towards using the average.
B. Evaluation Of Past Returns
To evaluate whether these returns measure up to requirements, we compare the return on equity to the cost of equity from the previous section.
Return on Equity = 24.95%
Cost of Equity = 13.85%
Equity Return Spread = 24.95% - 13.85% = 11.10%
This spread, when multiplied by the book value of equity, yields a measure of the surplus value created by existing projects (called the Equity EVA).
Equity EVA = (Return on Equity — Cost of Equity) (BV of Equity) = (.2495 — 1385) ($11,368 million) = $1,262 million
A similar analysis, comparing return on capital to cost of capital, yields the following numbers.
Return on Capital = 18.69%
Cost of Capital = 12.22%
EVA = (.1869 — .1222) ( 19,031 million) = $1,232 million
On both measures, it looks like Disney is creating about $1.2 billion in surplus value each year because of the excess returns it makes on its existing projects. While we have a measure of operating income at the division level, we do not have a breakdown of book value at the division level. If we did, we could compute the returns on capital, on a division level, and compare them to costs of capital, on a division level, to estimate divisional EVA
