Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 508

Estimating Growth in EBIT: Disney

! We begin by estimating the reinvestment rate and return on capital for Disney

in 2003 , using the numbers from the latest financial statements. We did

convert operating leases into debt and adjusted the operating income and

capital expenditure accordingly.

• Reinvestment Rate 2003 = (Cap Ex – Depreciation + Chg in non-cash WC)/ EBIT ( 1 -
  t) = ( 1735 – 1253 + 454 )/( 2805 ( 1 -. 373 )) = 53. 18 %


• Return on capital 2003 = EBIT ( 1 - t) 2003 / (BV of Debt 2002 + BV of Equity 2002 ) =
  2805 ( 1 -. 373 )/ ( 15 , 883 + 23 , 879 ) = 4. 42 %


• Expected Growth Rate from existing fundamentals = 53. 18 % * 4. 42 % = 2. 35 %
  ! We will assume that Disney will be able to earn a return on capital of 12 % on
  its new investments and that the reinvestment rate will be 53. 18 % for the
  immediate future.


• Expected Growth Rate in operating income = Return on capital Reinvestment
  Rate = 12 % . 5318 = 6. 38 %

The book value of debt is augmented by the $1,753 million in present

value of operating lease commitments. The unadjusted operating

income for Disney was $2,713 million. The operating lease adjustment

adds the inputted interest expense on the PV of operating leases to the

operating income (5.25% of $1753 million= $92 million), the current

years operating lease expense to capital expenditures ($556 million)

and the depreciation on the leased asset to depreciation ($195 million).

Disney earned a return on capital of 19% prior to its acquisition of

Cap Cities. Since then, the return on capital has been in a downward

spiral and 9/ 11 made the spiral worse. The reinvestment rate has also

jumped around, with acquisitions driving reinvestment up in some

years above 100%.