Discounted cash flow approach:
Type of cash flow used and reason for use of such cash flows:
Net cash flow from operating activities have been used to calculate the value of the company as it is the amount of cash available to the equity shareholders.
Projection of cash flow:
Firstly, the cash flows of the last five years have been prepared and then the management expects to achieve a growth rate of 5% in the future. Accordingly, the projected cash flows from operating activities have been adjusted by adjusting the cash flows with the growth rate of 5% (“Discounted Cash Flow Method for Valuing International Chemical Distributors”, 2018).
Reasonableness of the projections:
The cash flow projections is extremely reasonable as the management has cautiously used a meagre growth rate of 5% in the future which is very much achievable by the company in the future.
Adequate discussion on depreciation expenses:
Since the net cash flows from operating activities have been assumed to grow at a rate of 5% in the future thus, the depreciation expenses has already been adjusted without any further calculation on the same (Cifuentes, 2016).
Capital expenditure:
Capital expenditure has not been considered as the cash flow from operating activities have been considered for calculation of value of the company.
Working capital:
Working capital changes has been considered as per the norm of adjust the cash flows from operating activities in all the five years on the basis of which projected cash flow statement has been prepared.
Non-operating assets and liabilities:
Cash flows from operating activities has been used for calculating the value of the company. The use of no-operating assets and liabilities is not required for calculating net cash flows from or to operating activities (Johnsen, 2015).
Non-operating cash flows:
Impact of non-operating cash flows has been removed for calculating the net cash flows from operating activities to calculate net cash flows from operating activities.
Calculation:
In order to use the discounted cash flow approach firstly it is important to prepare the past income statement and cash flow statement on the basis of which projected cash flow statement shall be prepared. Income statement of Walt Disney for last five years is provided below to prepare cash flow statement from the information.
The net income showed below has been adjusted by removing the non-operating and non-cash items to calculate the net cash inflows from operating activities.
The cash inflows from operating activities has been multiplied by the growth factor to calculate the projected cash flows from operating activities in the future. The projected cash inflows has been adjusted by present value factor to calculate the discounted cash flows from operating activities available to equity shareholders (Vadilyev, 2016).
The residual value on the basis of growth factor has been calculated after that to add to the sum of present value of cash flows from operating activities to calculate the value of the company.
The entire calculation is shown below:
| INCOME STATEMENT of WALT DISNEY CO | |||||
| USD millions | 2014-09 | 2015-09 | 2016-09 | 2017-09 | 2018-09 |
| Revenue | 48,813.00 | 52,465.00 | 55,632.00 | 55,137.00 | 59,434.00 |
| Less: Revenue cost | 26,420.00 | 28,364.00 | 29,993.00 | 30,306.00 | 32,726.00 |
| (A): Gross profit | 22,393.00 | 24,101.00 | 25,639.00 | 24,831.00 | 26,708.00 |
| Operating expenses | |||||
| General, administrative and sales expenses | 8,565.00 | 8,523.00 | 8,754.00 | 8,176.00 | 8,860.00 |
| Restructuring and acquisition expenses | 140.00 | 53.00 | 156.00 | (157.00) | 30.00 |
| Operating expenses (others) | 2,148.00 | 2,301.00 | 2,371.00 | 2,939.00 | 2,981.00 |
| (B): Total operating expenses | 10,853.00 | 10,877.00 | 11,281.00 | 10,958.00 | 11,871.00 |
| Operating income (A- B) | 11,540.00 | 13,224.00 | 14,358.00 | 13,873.00 | 14,837.00 |
| Interest Expense | 294.00 | 265.00 | 354.00 | 507.00 | 682.00 |
| Other income/ (expense) | 1,000.00 | 909.00 | 864.00 | 422.00 | 574.00 |
| Earnings before tax | 12,246.00 | 13,868.00 | 14,868.00 | 13,788.00 | 14,729.00 |
| Less: Income tax provisions | 4,242.00 | 5,016.00 | 5,078.00 | 4,422.00 | 1,663.00 |
| Earnings from continuing operations / Net income | 8,004.00 | 8,852.00 | 9,790.00 | 9,366.00 | 13,066.00 |
Cash flow statement:
On the basis of above information the cash flow statement to calculate the net cash inflow or outflow from operating activities are provided below.
| CASH FLOW STATEMENT of WALT DISNEY CO | |||||
| Fiscal year ends in September. USD in millions except per share data. | 2014-09 | 2015-09 | 2016-09 | 2017-09 | 2018-09 |
| Cash Flows From Operating Activities | |||||
| Earnings from continuing operations / Net income | 8,004.00 | 8,852.00 | 9,790.00 | 9,366.00 | 13,066.00 |
| Add/ (less) | |||||
| Depreciation provided in income statement | 2,288.00 | 2,354.00 | 2,527.00 | 2,782.00 | 3,011.00 |
| Deferred income taxes | 517.00 | (102.00) | 1,214.00 | 334.00 | (1,573.00) |
| Compensation on stock basis | 408.00 | 410.00 | 393.00 | 364.00 | 393.00 |
| Increase in working capital | (2,472.00) | (1,586.00) | (2,006.00) | (2,370.00) | (2,720.00) |
| Other non-cash items | (201.00) | 188.00 | 292.00 | 682.00 | 758.00 |
| Net cash provided by operating activities | 9,780.00 | 10,909.00 | 13,213.00 | 12,343.00 | 14,295.00 |
| CASH FLOW STATEMENT of WALT DISNEY CO | |||||
| Fiscal year ends in September. USD in millions except per share data. | 2019-09 | 2020-09 | 2021-09 | 2022-09 | 2023-09 |
| Cash Flows From Operating Activities | |||||
| Net cash flows from operating activities | 14,293.95 | 15,008.65 | 15,759.08 | 16,547.03 | 17,374.39 |
| Present value factor @5.44% | 0.9484 | 0.8995 | 0.8531 | 0.8091 | 0.7673 |
| Present value of cash net operating cash flows | 13,556.48 | 13,499.91 | 13,443.57 | 13,387.47 | 13,331.61 |
| Sum of present value of net cash flows | 67,219.03 | ||||
| Add: Residual value | 279,963.73 | ||||
| Value of the company | 347,182.76 |
Value of the company as can be seen from the above calculation is $347,182.76 million.
Working note I:
Residual value:
| Particulars | Amount ($’ million) |
| Cash flow in year | 17,374.39 |
| Growth factor | 1.05 |
| Available cash flow | 18,243.10 |
| Terminal value | 364,862.10 |
| Present value factor | 0.7673 |
| Residual value | 279963.725 |
Working note II:
Calculation of weighted average cost of capital:
| 2014-09 | 2015-09 | 2016-09 | 2017-09 | 2018-09 | Average | |
| Long term debt | 12,676.00 | 12,773.00 | 16,483.00 | 19,119.00 | 17,084.00 | 15,627.00 |
| Interest expense | 294.00 | 265.00 | 354.00 | 507.00 | 682.00 | 420.40 |
| Common stock | 34,301.00 | 35,122.00 | 35,859.00 | 36,248.00 | 36,779.00 | 35,661.80 |
| Dividend | 1,508.00 | 3,063.00 | 2,313.00 | 2,445.00 | 2,515.00 | 2,368.80 |
| WACC | Weight | Proportionate cost | |
| Cost of debt | 2.69 | 0.3046864 | 0.82 |
| Cost of equity | 6.64 | 0.6953136 | 4.62 |
| WACC | 5.44 |
References:
Cifuentes, A. (2016). The Discounted Cash Flow (DCF) Method Applied to Valuation: Too Many Uncomfortable Truths. SSRN Electronic Journal, 1(2), 124-233. doi: 10.2139/ssrn.2845341
Discounted Cash Flow Method for Valuing International Chemical Distributors. (2018). The Journal Of Private Equity, 1(2), 17-237. doi: 10.3905/jpe.2018.22.1.052
Johnsen, Å. (2015). Strategic Management Thinking and Practice in the Public Sector: A Strategic Planning for All Seasons?. Financial Accountability & Management, 31(3), 243-268. doi: 10.1111/faam.12056
Vadilyev, A. (2016). Cash Flow Environment and Saving-Cash Flow Sensitivity. SSRN Electronic Journal, 2(2), 118-224. doi: 10.2139/ssrn.2727484
