FIN 320 Project Two Financial Analysis Report
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Principles of Finance 320
Southern New Hampshire University
FIN 320 Project Two Financial Analysis Report
Dianna Sheely
1
The following report is for The Walt Disney Company for the quarter ending July 1, 2023. It will assess the company's current financial health, explore available financial options for
improvements, and provide recommendations for maintaining or improving its financial health.
Financial Analysis and Financial Evaluation
1.
Financial Analysis
A.
Financial Calculations
Working capital = (Current Assets – Current Liabilities)
Quarter ending 7/1/2023: $1,940,000 Quarter ending 7/2/2022: $718,000
Working capital increased by $1,222,000. Based on these figures, The Walt Disney Company does have the ability to pay its current liabilities using its current assets. Current Ratio = (Current Assets/Current Liabilities)
Quarter ending 7/1/2023: 1.07
Quarter ending: 7/2/2022: 1.02
The current ratio had a slight increase of 0.05. Indicating that the company can currently meet its
current short-term obligations.
Debt ratio = (Total Liabilities/Total Assets)
Quarter ending 7/1/2023: 0.46
Quarter ending: 7/2/2022: 0.48
The debt ratio slightly decreased but remains below 1, indicating a larger portion of assets is funded by equity.
2
Earnings Per Share = (Net Income/Weighted Average -Common Shares Outstanding)
Quarter ending 7/1/2023: (0.26)
Quarter ending: 7/2/2022: 0.79
The earnings per share were down from .79 to -0.26.
Price/Earnings ratio = (Share Price (end of quarter)/EPS)
Quarter ending 7/1/2023: (357.12)
Quarter ending: 7/2/2022: 124.86
The price/earnings ratio, down from 124.86 to -357.12, indicates that The Walt Disney Company has a negative return and is currently losing money.
Total Asset Turnover Ratio = (Total Revenue/Total Assets)
Quarter ending 7/1/2023: 0.11
Quarter ending: 7/2/2022: 0.11
Walt Disney Co's asset turnover ratio for Q3 2023 remained at 0.11, which is still below the average since 2022. This is a ratio that is an indicator of how efficiently Disney is deploying its assets.
Financial Leverage = (Total Assets/Shareholder’s Equity)
Quarter ending 7/1/2023: 2.00
Quarter ending: 7/2/2022: 2.12
The financial leverage ratio of 2.00, although down from 2.12 in 2022, indicates that right now, The Walt Disney Company is a risky investment. A financial leverage ratio of less than 1 is usually considered good by industry standards. A leverage ratio higher than 1 can cause a 3
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company to be considered a risky investment by lenders and potential investors, while a financial leverage ratio higher than 2 is cause for concern. (Girsch-Bock, 2022)
Net Profit Margin = (Net Income/Total Revenue)
Quarter ending 7/1/2023: (0.02)
Quarter ending: 7/2/2022: 0.07
The net profit margin fell from 0.07 in 2022 to -0.02 by the third quarter of 2023. This indicates that the net income or profit that is being generated is negative.
Return On Assets = (Net Income/Total Assets)
Quarter ending 7/1/2023: (0.002)
Quarter ending: 7/2/2022: 0.01
Return on assets, which is used to determine how efficient a company is in the use of its assets to
generate a profit, also fell from 0.01 to -0.002. This is an indicator that profits fell.
Return On Equity = (Net Income – Preferred Dividends/Shareholder’s Equity)
Quarter ending 7/1/2023: 0.00
Quarter ending: 7/2/2022: 0.01
Return on equity, a measurement used to measure the rate of return earned by the common shareholders, we again see a drop from 0.01 to 0.
B.
Working Capital Management
Working capital management encompasses the day-to-day activities of managing the firm’s current assets and current liabilities. (Titman et al., 2016) We look at working capital to determine the company’s performance and if it can pay its 4
current liabilities. It is the difference between a company’s current assets and current liabilities. When comparing the current quarter ending 7/1/2023 to one year ago. Working capital has increased by $1,222,000. Disney has seen a slight increase in the current ratio of 0.05. Even though the ratio only showed slight growth, it still indicates that
the company can currently meet its current short-term obligations.
C.
Financing
There are multiple ways for a business to finance its operations and expansions. To raise capital to invest in new projects and grow, companies can use retained earnings, debt capital, and equity capital. Using retained earnings means companies don't owe anything, but shareholders may expect an increase in profits. Companies raise debt capital by borrowing from lenders and by issuing corporate debt in the form of bonds. Equity capital, which comes from external investors, costs nothing but has no tax benefits. (Estevez, 2023) The debt ratio for Disney decreased slightly
from .48 to .46, but since this ratio is below 1, it indicates that a greater portion of the company’s assets are funded by equity.
D.
Short-Term Financing
Short-term financing refers to loans or financing options that have a repayment period of less than a year. The Walt Disney Company requires short-term financing to enhance its liquidity and invest in its streaming services. One viable option for them is to opt for revolving credit lines. Disney can have access to these credit facilities through banks and financial institutions. These lines of credit can be 5
utilized whenever needed, providing the company with the flexibility to manage short-term liquidity issues or finance specific projects.
E.
Bond Investment
Corporate bonds are one way to invest in a company, offering a lower-risk, lower-
return way to bet on a firm’s ongoing success compared to its stock. Bonds offer a regular cash payout, and their price tends to fluctuate less than the company’s stock.
(James Royal, 2023) Interest payments on a bond come in two major types: Fixed rate, paid according to an exact agreed-upon rate, and floating rate. A floating rate bond can fluctuate depending on the interest rate environment. One disadvantage of bonds is the interest rate; if a bond is a fixed rate, you will know exactly what you’ll
receive in the future, but if it’s a floating rate, you will not know the rate since it can fluctuate. Bonds have a low chance of capital appreciation. What you should expect to earn on a bond is its yield to maturity. In contrast, a stock could continue to rise for decades, earning much more than a bond could. (James Royal, 2023) Also, bonds are not insured, so you have the potential to lose principal on your bonds if the company defaults. For example, if a company issues a $1,000 bond with a 4% interest rate, but the government subsequently raises the minimum interest rate to 5%, then any new bonds being issued have higher coupon payments than the company's initial 4% bond. To entice investors to purchase the bond despite its lower coupon payments, the company must sell the bond at less than its par value, which is called a discount.
If interest rates were to drop to 3%, the pre-existing 4% bond would sell for more than its par value, which is called a premium. (Boyte-White, 2022)
6
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The ethical bond market has grown significantly in recent years as investors have shown increasing interest in aligning their investments with their values and promoting sustainability. Ethical bonds provide issuers with a way to attract capital specifically for projects that contribute to a more sustainable and equitable future. (Jones, 2023) Ethical bonds are green bonds or social bonds that fund projects with environmental or social benefits, faith-based funds, funds that impact the communities, and socially responsible investing funds. F.
Capital Equipment
Capital equipment refers to items that are not permanently attached to buildings or grounds (freestanding) and cost more than $5,000 net of sales tax, freight, and installation costs. It must have a useful life of at least one year and is not consumed in the normal course of business. (Market Business News, 2018) Investing in capital
goods can improve productivity and enable faster and more accurate production processes, which can improve company profits by increasing productivity. New pieces of equipment can also lower costs and a company’s carbon footprint if they are more energy efficient. Investing in newer, more advanced equipment can help a company become more competitive in the marketplace or gain a strategic advantage
over others who are not advancing in production technology. The risk of the potential benefits is the cost. The high cost of acquiring new equipment needs to be weighed against the continued maintenance and training vs. the old. As well as weighing against ethical factors like whether the new equipment is better or worse for the environment. Will it reduce the company's carbon footprint? How will it impact current and future employees? 7
An example of a positive investment in capital equipment is Amazon. With its investment of up to $4 billion, Amazon is seeking a bigger footprint in A.I. development. (Satariano & Metz, 2023) By partnering with Anthropic, seen as the most promising A.I. start-up this year, Amazon aims to boost its cloud computing revenues. Amazon’s agreement with Anthropic could raise its profile in the field and fuel the development of new A.I. technologies inside the tech giant. “We can help improve many customer experiences, short- and long-term, through our deeper collaboration,” said Andy Jassy, Amazon’s chief executive. (Satariano & Metz, 2023)
G.
Building
Investing in a building depends on its specific characteristics and the nature of the business. There are risks involved, such as the possibility of the building not being suitable for its intended use, potential damage, or repair needs, and becoming outdated. On the other hand, the benefits include increased productivity due to the building's capabilities, greater efficiency through automation, and improved services leading to increased customer satisfaction. Ethical considerations must be made when deciding whether to invest in a building as well. Is it safe and suitable for the business's intended use? Is it safe for employees to work within? When a business is considering the potential return on investment in a building, several factors need to be taken into account. These include the initial purchase price of the building, the expected lifespan of the building, and the projected performance of the building. Additionally, the business must factor in the cost of 8
maintenance and repairs, along with any additional training that employees may require to operate the building properly.
A hypothetical example of a business investing in physical infrastructure would be if Amazon purchased a new office building to serve as its headquarters, with a building cost of $100 million and an expectation to last for 50 years. The return on investment for Amazon would be the cost savings over the 50-year period due to increased efficiency, as well as any added benefits to customer satisfaction arising from improved services.
2.
Financial Evaluation
A.
Bond Investment
For the given problem, considering all assumptions, the Required Rate of Return is 9% and the Net Present Value is negative -$13,976,075
; the investment is to be
avoided for The Walt Disney Company because the NPV is negative. 9
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B.
Capital Equipment
For the given problem, considering all assumptions, the Required Rate of Return is 12% and the Net Present Value is a positive $2,243,458; the investment in leasing equipment is a good option for The Walt Disney Company because the NPV is positive. C.
Building
10
For the given problem, considering all assumptions, the Required Rate of Return is 10% and the Net Present Value is a positive $864,920; this investment is a good option for The Walt Disney Company because the NPV has a positive value.
D.
Future Financial Considerations
After analyzing the three financial investment options above, The Walt Disney Company does have a positive financial outlook. It is profitable to invest in leasing new equipment or purchasing a new building. I would recommend one of those two options, but not in investment bonds. 11
References
Boyte-White, C. (2022, January 13). When is a bond’s coupon rate and yield to maturity the same?
Investopedia. https://www.investopedia.com/ask/answers/051415/when-bonds-
coupon-rate-and-yield-maturity-same.asp Estevez, E. (2023, June 27). What are the sources of funding available for companies?
Investopedia. https://www.investopedia.com/ask/answers/03/062003.asp Girsch-Bock, M. (2022, August 5). A guide to financial leverage
. The Motley Fool. https://www.fool.com/the-ascent/small-business/accounting/articles/financial-leverage/
#:~:text=A%20financial%20leverage%20ratio%20of%20less%20than%201%20is
%20usually,2%20is%20cause%20for%20concern. James Royal, Ph. D. (2023, August 21). Corporate bonds: Here are the big risks and rewards
. Bankrate. https://www.bankrate.com/investing/corporate-bonds/ 12
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Market Business News. (2018, July 18). What is capital equipment? definition and meaning
. https://marketbusinessnews.com/financial-glossary/capital-equipment/
Mergent., (n.d). (n.d.). Disney (Walt) Co. (The) (NYS: DIS) (Company profile).
Retrieved September 9, 2023, from Mergentonline.com. https://mergentonline.com/
Satariano, A., & Metz, C. (2023, September 25). Amazon takes a big stake in the A.I. start-up anthropic
. The New York Times. https://www.nytimes.com/2023/09/25/technology/amazon-anthropic-ai-deal.html Titman, S., Keown, A. J., & Martin, J. D. (2016). 18.1 Working-Capital Management. In Financial Management: Principles and Applications, (13/e, p. 578). essay, Pearson. YouTube. (2023). Investing in ethical bonds for a better future
. YouTube
. Retrieved October 15, 2023, from https://www.youtube.com/watch?v=U_iiQ_fIQ1M. 13
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