Aswath Damodaran 196
From Project to Firm Return on Capital: Disney in 2003
! Just as a comparison of project return on capital to the cost of capital yields a
measure of whether the project is acceptable, a comparison can be made at the
firm level, to judge whether the existing projects of the firm are adding or
destroying value.
! Disney, in 2003 , had earnings before interest and taxes of $ 2 , 713 million, had
a book value of equity of $ 23 , 879 million and a book value of debt of 14 , 130
million. With a tax rate of 37. 3 %, we get
Return on Capital = 2713 ( 1 -. 373 )/ ( 23879 + 14130 ) = 4. 48 %
Cost of Capital for Disney= 8. 59 %
Excess Return = 4. 49 %- 8. 59 % = - 4. 11 %
! This can be converted into a dollar figure by multiplying by the capital
invested, in which case it is called economic value added
EVA = (.. 0448 -. 0859 ) ( 23879 + 14130 ) = - $ 1 , 562 million
A firm can be viewed as having a portfolio of existing projects. This approach
allows you to assess whether that portfolio is earning more than the hurdle rate,
but it is based upon the following assumptions:
- Accounting earnings are a good measure of the earnings from current
projects (They might not be, if items like R&D, which are really
investments for the future, extraordinary profits or losses, or accounting
changes affect the reported income.)
- The book value of capital is a good measure of what is invested in
current projects.
