: CORPORATE GOVERNANCE AND DIFFERENCES IN CAPITAL BUDGETING CONCEPT AND METHODS BETWEEN AMERICAN AND JAPANESE COMPANIES
A CASE ANALYSIS ON TOKYO DISNEYLAND AND THE DISNEYSEA PARK: CORPORATE CORPO RATE GOVERNANCE AND DIFFERENCES IN CAPITAL BUDGETING CONCEPT AND METHODS BETWEEN AMERICAN AND JAPANESE COMPANIES
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A CASE ANALYSIS ON TOKYO DISNEYLAND AND THE DISNEYSEA PARK: CORPORATE GOVERNANCE AND DIFFERENCES IN CAPITAL BUDGETING CONCEPT AND METHODS BETWEEN AMERICAN AND JAPANESE COMPANIES
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Cases in Financial Decision Making (F-506)
SUBMITTED TO Dr. M. Sadiqul Islam Professor Dept. of Finance University of Dhaka
SUBMITTED BY M.B.A. 12th Batch Group-11
Name
Roll
Md. Harun Or Rashid
12-013
Sheikh Fahmida
12-073 12-131
Md. Asikuzzaman Md. Mamun Siraj Md. Anjunur Rahman
12-165 12-166
Date of Submission- 12th November, 2011
Letter of Transmittal
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November November 12, 2011
Dr. M. Sadiqul Islam Professor Department of Finance University of Dhaka
Subject: Submission of Report on “Case analysis- Disney Sea Park”.
Dear Sir We are feeling immense pleasure as knuckling down to preparing this report as a partial requirement of course F-506(Cases in Financial Decision Making) at the threshold of submitting this Case study on Capital Budgeting Decision. We have been able to execute our assigned task within the timeframe although the possibility of making mistakes cannot be erased completely. We would like to mention that, we tried our best to prepare the case paper to our greater extent through reading, consulting, discussing the case among the members of our group. We are still learners and we are in the process of learning. So, at this moment we hope that you will pardon us and overlook them considering that we are still learners and you will give us the necessary suggestions that you always give for the improvement of our quality in future.
Yours Sincerely The members of Group -11 MBA, 12th Batch Department of Finance University of Dhaka
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Acknowledgment At first we want to express our heartiest gratitude to all mighty Allah for the successful completion of the project. Case analysis has been included in the MBA program with an objective to increase the analytical ability of the students. As a part of this objective our venerable course teacher Professor Dr. M Sadiqul Islam has included a series of case analysis in the course curriculum. We are Group-11 and our assigned case is “The Disney Sea Park” We express our sincere gratitude to our honorable course teacher Prof. Dr. M. Sadiqul Islam for his guidance, advice and assistance in preparing the assigned case. We are really grateful to our course instructor for his unstinted support, timely and sophisticated direction and finally finally eternal eternal morale morale in learning learning the knowledge knowledge through through preparing preparing cases. For the persistent source of inspiration, we can take something in our life that should be the invaluable guidance in our life emanating from our teachers. So he should be placed on the podium. Finally we must thank all the group members as the report resulted from excellent group effort.
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Objective of
the Case Study
The major objectives behind the case study are mentioned below: To broaden the analytical ability
To fulfill fulfill the the partial partial requiremen requirementt of MBA program. program.
To relate theoretical theoretical knowledge knowledge to practical practical oriented oriented
problem. To know how to take capital investment decisions.
Limitation of the Case Analysis The major limitations of this report are:
Non-availability Non-availability of information information for better better analysis
We have shortage of information to measure the riskiness of the project.
Methodology
Qualitative and Quantities analysis are made
Some essential data which are not given are assumed
All the information used in this report has been gathered
from the case regarding The Becker Corporation
We have used some computer software to make the analysis
a viable one.
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T
A A B L E
O F
C O N T E N T S
Table of Contents Page No.
TOPICS
Executive Summary
v
Case Synopsis Overview of Oriental Land Economy Analysis Industry Analysis
1-2 3 4 5-6
Company analysis SWOT Analysis Ratio Analysis
7 8-11
Risk Analysis Business Risk Analysis Financial Risk Analysis Country Risk Analysis
12-13 14 15-18
Prospective Analysis Valuation of OL without the Project Simulation Analysis
19-20 20-24
Proj ect Anal Project Analysi ysiss Valuation of OL with the project Simulation Analysis
25 26-30
Problem Analysis Recommendation
31-35 36
•
•
•
•
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Executive Summary This report intends to cover a vast and very important area of importance of capital budgeting and investment. investment. Here a case analysis has been done on “Tokyo Disneyland and the Disneysea Park: Corporate Governance and Differences in Capital Budgeting Concept and Methods Between American and Japanese Companies” .
The first part is a case overview which states a brief description of Tokyo Disneyland and the Disney Sea Park. It is followed by a description of its economy and industry to determine its present situation of the industry where it exists. The next part provides p rovides an analysis of its competitive competitive strategy. It follows expansion strategy.
In company analysis part SWOT is done to depict the position of company in its indust industry. ry. Th Thee next next part part is ratio ratio analys analysis is and risk risk analys analysis. is. Th Thee decom decompos positi ition on of earnings is done through using traditional approach of DU-Pont and the alternative approach.
To evaluate the project NPV, IRR, ARR and Average cash Flow Return Method. All the methods provide favorable results to accept the project except for the ARR. There are also analyzed the corporate governance part. Walt Disney Company is USA based companies which follow Anglo-American Anglo-American type of corporate governance system. Tokyo Disneyland and Tokyo Disney Sea Park are Japanese based companies which follow Japanese-German type corporate governance system. There are sequentially analyzed the the prob proble lem m stat statem emen ent, t, prob probab able le solu soluti tion ons, s, and and cour course sess of acti action ons, s, deci decisi sion on,, recommendation recommendation and justification.
Chapter1 1.1 Case Synopsis 11
Oriental Land co Ltd. (OL) is a Japan based company. It had a negotiation with US based Walt Disney Company (WD). In 1979, Oriental land corp signed a license agreement with Disney Company (WD) to establish Tokyo Disneyland. The license agreement involves the design, construction, and operation of Tokyo Disneyland. . Walt Disney (WD) was not willing to pay anything for the construction of the park, but it wante wanted d 10% 10% royal royalty ty on the admissi admission on fee and sales sales of foods foods and beverag beverages. es. An agreement was signed which stipulated a license of 10% on admission fee and 5 % on food, beverage and novelty goods. Tokyo Disneyland was a smashing hit. The first year it drew 10.3 million visitors, in line with WD’s expectations. After the opening year, the number of visitors never went below 10 million and the number of visitors peaked in 1998, at 17.45 million. Walt Disney wished to maximize revenue from Japan through license fees. It therefore offered to build a new DisneySea park project in Japan with Oriental land corp. Tokyo DisneySea was to be a unique institution, a first of its kind in the world. Japan was an island country surrounded by the seas as such the Japanese had a strong attachment to a theme concerning the sea. The target audience was those adults who had been children when Tokyo Disneyland had been introduced. Walt Disney offered the same terms and condit condition ionss for new Disne DisneyS ySea ea Park. Park. OL’s OL’s manag managem ement ent strong strongly ly opp oppos osed ed to the the licensing fee format for DisneySea Park and express vies as “we can hardly agree with a plan to do it under the same conditions. It is quite unfair if the US side is to take no risk, use the land free with with no financial burden, but collect collect the royalty.” To overcome overcome deadlo deadlock ck in negoti negotiati ations ons with with WD, WD, OL’s OL’s senior senior execu executiv tives es asked asked the the planni planning ng department to conduct a financial analysis as top priority. The senior management wanted to know how long it would take for the DisneySea Park to start generating profits.
Oriental Land Co Ltd Oriental Land was established on 11th July, 1960. It has Paid-in capital of $0.53 billion and annual sales revenue is $1.53 billion. This corporation brought Walt Disney in Japan. The company was listed in Tokyo Stock Exchange in 1996. The share price in that year was pretty good but the price declined in 1997. The company is now trying to take two projects Tokyo Disneyland and Tokyo DisneySea Park. The negotiation in being conducted conducted with US based Walt Walt Disney to conduct these two projects. projects.
Tokyo Disneyland In 1979 Walt Disney negotiated the terms for Tokyo Disneyland with Oriental land corp and it had proven to be a tough negotiator. It offered only the know- how without shouldering any risk. It was not willing to pay anything for the construction of the park, 12
but it wanted 10% royalty on the admission fee and sales of foods f oods and beverages. An agreement was signed which stipulated a license of 10% on admission fee and 5 % on food, beverage and novelty goods. At the time of negotiation, Walt Disney’s financial position was weak. Under weak financial condition, collecting a fixed amount of money from their overseas partner was an attractive proposition for WD. In April 1979, Walt Disney Company (WD) signed a license agreement with Oriental land corp involving involving the design, design, construct construction, ion, and operatio operation n of Tokyo Tokyo Disneyl Disneyland. and. Oriental land corp took less than three years to complete the construction of Tokyo Disneyland and opened its business in April 1983. The first year Tokyo Disneyland drew 10.3 million visitors in line with WD’s expectations. The number of visitors reached 13.38 million in 1987 and the number of visitors pinnacled in 1998, at 17.45 million and the park’s attendance figure never dropped below 16 million in the years that followed.
Tokyo DisneySea Park Walt Disney wished to maximize revenue from Japan through license fees. It therefore offered to build a new DisneySea park project in Japan with Oriental land corp. WD expected income similar to that received for Tokyo Disneyland. Tokyo DisneySea was to be a unique institution, a first of its kind in the world. Japan was an island country surrounded by the seas as such the Japanese had a strong attachment to a theme concerning the sea. The target audience was those adults who had been children when Tokyo Disneyland had been introduced The two companies could not agree on the terms and conditions and the relationship between the two were unharmonious. unharmonious. OL’s top management management discussed with WD for better negotiation and WD responded that there is no point in any discussions. OL’ s top management strongly opposed to the same licensing fee format for the DisneySea Park. To overcome deadlock in negotiations with WD, OL’s senior executives asked the planning department to conduct a financial analysis as top priority. The senior management wanted to know how long it would take for the DisneySea Park to start generating profits.
1.2 Ba 1.2 Back ckg gro roun und d of Or Oriien enta tall La Land nd Co Comp mpan any y Limited
Name
: Orient Land Land Co Ltd. Ltd. 13
Date of establishment Paid-in Capital
: July 11, 1960 : ¥63 billion (US$ 0.53 billion)
Sales
: ¥180 billion (US$ 1.53 billion)
Income before tax
: ¥28 billion (US$ 0.24 billion)
President
: Toshio Kagami
Member of board
: 28
Employees
: 2,493 (Full time) : 6,355 (Per time)
Address
: 1-1, Maihama, Urayasushi, Chiba-ken, Japan
Main bank
: Industrial Bank of Japan, Mitsui Trust Bank
Major Shareholders
: Mitsui Real Estate Corp (20.48%) : Keisei Electric Railway Corp (11.20%)
Tie-up Company
: Disney Enterprises Inc. (USA)
Chapter-2 2.1 Economy Analysis Japan Japan has a large industrial capacity, and is home to some of the largest and most technologically advanced producers of motor vehicles,electronics vehicles, electronics,, machine tools, steel 14
and nonferro nonferrous us metals, metals, ships, ships, chemical substances, substances, textiles, textiles, and processed foods. foods. Agricult Agricultural ural businesse businessess in Japan Japan cultiv cultivate ate 13 perce percent nt of Japan Japan's 's land, land, and Japan Japan accounts for nearly 15 percent of the global fish catch, second only to China. As of 2010, Japan's labor force consisted of some 65.9 million workers. Japan has a low unemployment unemployment rate of around four percent. Almost one in six Japanese, or 20 million people, lived in poverty in 2007. Housing in Japan is characterized by limited land supply in urban areas.
GDP GDP growth rate is low in Japan. Sometimes Sometimes it was negative. The growth of GDP over the last five years is given below: Year 1993 1994 1995 1996 1997
GDP 0.44% 0.12% -0.50% -0.63% 0.53%
Inflation Inflation rate is very low in Japan. From the year 1993 to 1995, inflation rate declined. Then in the year 1996 the rate started to climb up and it was 1.77% in 1997. Year 1993 1994 1995 1996 1997
Inflation 1.27% 0.69% -0.12% 0.13% 1.77%
Life style Japanese peaple lead a very luxurious life. As the per capita income is very high they can spend lots of money for living a better life. Unemployment rate in Japan is very low. Most of the people are educated. People do not mind doing any sort of work. They love amusement. So they go for long drive and theme park. They have family tour to different places.
Chapter 3 INDUSTRY ANALYSIS 3.1 Porter’s Five Forces Model Industry analysis helps to measure the profit potential of the industry in which the firm is competing because the profitability of various industries differs systematically and predictability over time. To analyze the industry situation `Porters Five Forces Model’ 15
has been used. By using this analysis the present industry situation is determined to make further decision. The result of industry analysis by using Porters Five Forces Model is given below:
3.2.1 Threat of New Entrants- Low Entrants- Low The company is establishing Tokyo Disneyland and DisneySea park. This type
of park establishment needs huge investment. Besides this the suitable and available place is also rare. So threat of New Entrants is very low. The company has been able to grow over a long period of time. By relying on past experience, company officials know to a large extent what the target customer wants. As Disney pretty much dominates the family entertainment market, it will be very diff diffic icul ultt for for a new new orga organi niza zati tion on to deve develo lop p bran brand d reco recogn gnit itio ion, n, bran brand d identification and product differentiation. Being a market leader has made it possible for the company to practice practice effective economies economies of scale in production. In addition, an extremely large amount of capital investment is required for new entrants into the industry if they want to compete with the Disney Corporation. Only very large companies can meet such large capital requirement. 3.2.2 Rivalry among Existing Firm- Low Very few players play the game in this industry. So intra industry rivalry is low.
This sector has huge opportunity but scope for business expansion is limited as huge investment and suitable place imposes some constraints. So rivalry among existing firm is low. 3.2.3 Bargaining Power of Buyers- High
bargai aini ning ng powe powerr of cust custom omer erss is hig high in the serv servic icee and and in the the The barg entertainment industry. Since a large number of customers are needed to make Disn Disney ey's 's oper operat atio ions ns run run sm smoo ooth thly ly,, the the cust custom omer erss have have cert certai ain n powe powers rs.. Customers Customers may be reluctant to spend the money needed to purchase the product. A majority of Disney's product mix focuses on intangible returns on the buyer's money. The case that some customers may not realize that they are getting such a return may increase the bargaining power of the customers.
3.2.4 Bargaining Power of the Supplier- High The bargaining power of supplier is very high as the licenser was tough party to
negotiate with. Licenser was very very hard with their terms terms and conditions and the party will not pay anything anything but take the royalty royalty fees. So the bargaining bargaining power of supplier is very high. 3.2.5 Threat of Substitute Product- Low
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amusement park does not Threats of substitute product are very low because the amusement have any alternative product. Those who are eager to come to visit the park must mu st visit. visit. Obvio Obviousl usly, y, other other cartoo cartoon n figure figures, s, theme theme parks, parks, and mo movie viess can penetrate the market in which Disney is operating in, but this is not necessarily representing a significant threat.
So, the five forces model can be shown by the following diagramdiagram-
Threat of New EntrantsLow
Rivalry among Existing FirmLow
Threat of Substitute ProductLow
INDUSTRY PROFITABILIT Y
Bargaining Power of BuyersHigh
Bargaining Power of SuppliersHigh
Chapter 4 COMPANY ANALYSIS ter2: INDUSTRY ANALNALYSIS 4.1 SWOT Analysis 17
SWOT SWOT analys analysis is is a strategic strategic planning planning meth method od used used to eval evalua uate te the the Stre Streng ngth ths, s, Weaknes Weaknesses/L ses/Limit imitation ations, s, Opportun Opportunitie ities, s, and Threats Threats involved involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. For the purpose of analysing the project Tokyo Disneyland and the DisneySea DisneySea Park the SWOT analysis has been conducted for Oriental Land Corp (OL). The results of SWOT analysis are given below: Strength
1. Continious technical and management management support are are coming from Walt Disney. 2. Orient Orient Land Land Corp Corp and Walt Disney Disney brand brand have merged merged togeth together er to produce a greater synergistic effect. 3. Around 2493 full time employees employees and 6355 part part time employees are working in OL. 4. Highl Highline inerr brand brand 5. The Industr Industrial ial Bank of Japan Japan and Mitsu Mitsuii Trust Trust Bank was the second second largest largest partner 6. OL got got 750 750000 000 tsub tsubo o which which is 10 times times large largerr than the the Disney Disneyla land nd in Los Los Angeles 7. Highly Highly profita profitable ble busine business ss 8. The main strengths in internal resources refer to human resources and financial stability
Weakness
1. Custome Customerr would get get bored with with the existin existing g attraction attraction and and facilitie facilitiess 2. WD’s WD’s position position in the Tokyo Tokyo Disneyl Disneyland and contrac contract-t t-take ake no risk, risk, just collect collect the fee 3. High High ove overh rhea ead d expe expense nsess Opportunity
1. High High demand demand (Most (Most of the custo customer merss were repeat repeat visitor visitors) s) 2. OL to be a potent potential ial fut future ure lea leader der 3. The future future of Japanese Japanese industr industries ies would would shift toward toward the service service industrie industriess 18
Threat
1. There There is a chance chance of dema demand nd fall. fall. Manage Manageme ment nt is estim estimati ating ng a steady steady fall fall in demand after four years. 2. Charged Charged highe higherr licensin licensing g fee by the the Walt Walt Disne Disney y 3. The effect effectss of an economic economic depress depression ion could could make it too too expensive expensive for for people people to utilize the services and the products offered.
4.2 Ratio Analysis Ratio analysis has actually been done to measure the historical performance of the company. For data constraint it was not possible to calculate most of the required ratios but some important important ratios were calculated calculated based on the provided provided data which would would give the insight about the company’s recent performance. The ratios those are calculated based on the historical historical date are given below: below:
Operating Profitability Ratio Profitability ratios measure the specific companies expected ability to generate profit.
Profitability ratio 1996 Operating profit margin 0.17 Net profit margin 0.09 ROA 0.04
1997
0.16 0.09 0.04
From the above given data the performance of the company for the year 1996 and 1997 is found. found. Th Thee perfor performa mance nce of the compa company, ny, in terms terms of operat operating ing profit profit marg margin, in, decresed slightly in 1997 than in 1996. It was due slight decrease in the Earning Before Interest and Taxes (EBIT). Net profit margin and Return On Asset (ROA) remains constant for both the years. The graphical presentation of these profitability is given below:
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Efficiency Ratio Efficiency ratio FAT TAT
1996 1.25 0.48
1997
1.36 0.51
Fixed asset turnover measures the company's ability to use its fixed assets to generate sales and Total asset turonver measures the company's ability to use its total assets to generate sales. Here the results of both fixed asset turnover and total asset turnover tells that the company’s performance is improving. The trend of fixed asset turnover and total asset turnover are in increasing trend. Fixed asset turnover in 1996 was 1.25 and it increased to 1.36 in 1997. At the same way total asset turnover increased from 0.48 to 0.51 in 1997. Here, the graphical presentation of efficiency ratios is given:
Leverage Ratio 20
Times interest earned
1996 23.44
1997
29.05
Times interest earned ratio shows the company's ability to pay interest expenses with the current level of business activities. The times interest earned ratio for the company shows positive trend. This ratio is on increasing pattern. In the year 1996 the ratio was 23.44 which increased to 29.05 in 1997. So the company’s performance performance is improving in terms of times interest earned. The graph for this ratio is given below:
4.3. DuPont Analysis The DuPont system divides the ratio into several components that provide insights into the causes of a firm’s ROE and any change in it. It also provides additional insights into the effect of financial leverage on the firm and pinpoints the effect of income taxes on ROE. ROE is a comprehensive indicator of a firm’s performance because it provides an indica indicatio tion n of how well manag manager erss are are emplo employin ying g the funds funds invest invested ed by the firm’s firm’s shareholders to generate returns.
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D U P O N T A N A L Y1 9S 9I 6S
1 99 7
1 99 99 8
1 99 9
2 000
200 1
2 00 2
2 00 3
20
N e t P r o f i t A T / N 0e. t1 7S 1a 0l 0e .s 1 6 1 0 0 . 1 6 0 1 0 . 1 6 1 3 0 . 0 5 8 1 0 . 0 6 1 4 0 . 1 6 6 8 0 . 2 3 0 1 0 . 2 6 3
N e t S a l e s / T o t a l A 8s.s6e%t s 8 . 8 % ROA 4 .1% 4 .5% A 4 .1% 4 .5% T o t a l A s s e ts /S t Equity ROE
N P M TAT LEVERAGE
8 .8%
8 .9%
9.0%
9.1%
9.2%
9.3%
9.4%
4 .7%
5 .1%
5.4%
5.7%
6.1%
6.6%
7.0%
4 .7%
5 .1%
5.4%
5.7%
6.1%
6.6%
7.0%
1 0 6 .6 %1 0 6 .1 %1 0 5 .7 %1 0 5 .3 %1 0 4 .9 %1 0 4 .6 5 .7%
6 .1%
6 .5%
1 7 .1 % 1 6 .1 % 1 6 .0 % 1 6 .1 % 5 .8 %
6 .1 %
1 6 .7 % 2 3 .0 % 2 6 .3
8 .6%
9.1%
9.2%
8 .8%
5 .4%
8 .8%
8 .9%
9.0%
6 .9%
9.3%
7 .3%
9.4%
1 0 6 .6 %1 0 6 .1 %1 0 5 .7 %1 0 5 .3 %1 0 4 .9 %1 0 4 .6
R O E
5 .4%
5 .7%
6 .1%
6 .5%
6 .9%
Interpretation: The three factor model shows that financial leverage attributed most to the ROE to rise. Here we see that ROE is more sensitive with leverage than to assets and profit margin. The sensitivity of ROE is also changes dramatically as the time changes.
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7 .3%
Chapter 5 RISK ANALYSIS Risk of Oriental Land can be categorized in four types: 1. Busi usiness ness Risk isk 2. Finan inanci cial al Risk isk 3. Count ountrry risk isk
5.1 Business Risk
Qualitative Risk Analysis Product Obsolescence Obsolescence:: Product obsolescence is reasonably moderate. Sensitivity with Business Cycle: Cycle: The business is sensitive with business
cycle. As the present economic condition is downturn, the risk is said to be high. It implies when the economic condition will improve the risk may reduce. amusement park Natural disaster disaster : Earthquake hit Japan frequently. The amusement like Tokyo Disney Land can be destroyed. Availability of Raw Materials: The raw materials are not available.
This type of business needs huge investment.
Quantitative Risk Analysis Volatility of Sales and Earnings:
2024.689 711.7342
Ave. Sales Sales STD. Sales CV of Sales
0.351528
Interpretation: As C.V. C.V. of Sales Sales is less less than .5 for the end end of year 2004. 2004. The sales volatility of Oriental Land is moderate because the sales had not been very steady over the last few years. We can interpret it in this way that the company is involved in such a business that there is not possibility of risk arising from the volatility of sales.
260.3333 119.1164 0.457553
Ave. EBIT EBIT STD. EBIT CV of EBIT
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Interpretation: By scrutiny last nine years earnings it was found mean earnings
volatility is .4575 which is Moderate. Moderate. Degree of Operating Leverage (DOL):
Business risk depends in part on the extent to which a firm builds fixed cost into its operations- if fixed cost is high, even in small decline in sales can lead to a large decline in ROE. So, other things being constant, the higher a firm’s fixed costs, the greater its business risk. In a word, if high percentages of total costs are fixed, then the firm is said to have a high degree of operating leverage.
1996
1997
1998
1999
1453.2
1533.3
1564.9
0.0551
0.0206
0.0199
246.9
250.5
257.3
Sales % change in Sales
248. 5
EBIT
0.0271
94.6 0.63 2
1.3615 49
32.2 4
% change in EBIT
-0.0064 DOL
-0.11681
0.0146
0.7074 92
2000 1596 .1 0.01 96
2001 1627 .4 0.02 03 101. 9
2002
2003
2004
1660.4
2481.3
3002.7
0.4944
0.2101
0.1000
282.5
397.4
463.4
0.07 72
1.7723
0.4067
0.1661
3.80 55
3.5848 09
1.9355 74
1.6611 82
DOL is the only component of the overall business risk of the firm. The principal factors giving rise to business risk are variability of sales and production costs. The degree of Operating Leverage magnifies the impact of these factors on the variability of operating profit. DOL of -.1168 for 1997 indicates that for 1% change in sales causes a percentage change change in EBIT EBIT that is .1168 for 1997. 1997. 24
BUSINESS RISK HIGH
5.2 Financial Risk
Degree of Financial Leverage (DFL): Financial risk is the additional risk placed on the common stock holders as a result of the decision to finance with debt. The use of debt or the financial f inancial leverage, concentrates concentrates the firm’s business risk on its stockholders. This concentration of business risk occurs because debt holders, who receive fixed interest payments, bear none of the business risk.
Interpretation: The DFL of Oriental land is not within a reasonable range which does pose threat to the stockholders interest. After 2003 the degree of financial leverage would be 5.82. TIE measu measures res the firm’s firm’s abili ability ty to Tim Timee In Inter teres estt Ea Earne rned d (T (TIE IE): ): TIE measure all the fixed financial obligations such as interest payment by appropriately redefining numerator.
25
Interpretation: Time interest interest earned is decreasing after after 1999. In the first year it is 27.85 times and in 2004 it will be 11.36 times
FINANCIAL RISK IS LOW
5.3.Country Risk Japan: Political risk: There is a political stability in Japan. Socio economic conditions and investment investment profile
is favorable for the investors both from home and abroad. Intensity of external and internal conflicts is very limited and the country is ranked in very good position in case of eliminating corruption from the country. There is a systermatic law enforcement system which elables the country to eliminate all sorts of inequility. Japan is a constitutional monarchy where the power of the Emperor is Emperor is very limited. As a ceremonia ceremoniall figurehe figurehead, ad, he is defined defined by the constitution as "the symbol of the state and of the unity of the people". Power is held chiefly by the Prime Minister of Japan and other elected members of the Diet, while sovereignty is vested in the Japanese people State intervention in economic affairs is always closely watched by investors f or what it means for their decisions on where to allocate money, although this is usually more of a worry in emerging markets than in developed economies.
Economic Risk:
Japan is the third largest national economy in the world, after the United States and China, in terms of nominal of nominal GDP, and the fourth largest national economy in the world, after the United States, China and India in terms of purchasing purchasing power power parity. parity. After achieving one of the highest economic growth rates in the world from the 1960s through the 1980s, the Japanese economy slowed slowed dramatically in the early 1990s, when the "bubble economy" collapsed, marked by plummeting stock and real estate prices. Japan eventually recovered from its worst period of economic stagnation since World War II. Real GDP in Japan grew at an average of roughly 1% yearly in the 1990s, compared to growth in the 1980s of about 4% per year. 26
Financial Risk:
Japan's public debt was more than 200 percent of its annual gross domestic product, the largest of any nation in the world. According to Moody's Moody's rating Japan's long-term sovereign debt rating is Aa2 inline with the size of the country's deficit and borrowing level. The service sector accounts for three quarters of the gross domestic product. Japan has a large industrial capacity, and is home to some of the largest and most technologically advanced producers of motor vehicles,electronics vehicles, electronics,, machine tools, steel and nonferrous metals, ships, chemical substances, substances, textiles, textiles, and processed and processed foods. foods.
USA Political risk: Political risk is becoming a growing concern for investors in the United States as the
government plays a larger and more controversial role in private enterprise because of the financial crisis. Political risk is becoming more of a U.S. issue as some investors howl over what they see as arbitrary intrusion by the government in business affairs. In assessing political risks in emerging markets, investors often look at factors such as the stability of the government and the soundness of its economic policies. In developed countries, they assess things such as proposed changes to the tax system and the resulting impact on corporate profits. Risks in the United States include fears the dollar could dive because of the rapidly growing budget deficit and the potential for inflation because of radical moves by the Federal Reserve to flood the financial system with money. Economic Risk:
The US has the most powerful, diverse, and technologically advanced economy in the world, with a per capita GNP of $21,800, the largest among major industrial nations. In 1989 the economy enjoyed its seventh successive year of substantial growth, the longest in peacetime history. The expansion featured moderation in wage and consumer price increases and a steady reduction in unemployment to 5.2% of the labor force. In 1990, however, growth slowed to 1% because of a combination of factors, such as the worl worldw dwid idee incr increa ease se in inte intere rest st rate rates, s, Iraq Iraq's 's inva invasi sion on of Kuwa Kuwait it in Augu August st,, the the 27
subse sub seque quent nt spu spurt rt in oil price prices, s, and a gener general al declin declinee in bus busine iness ss and consum consumer er confid confidenc ence. e. Ongoi Ongoing ng proble problems ms for the 199 1990s 0s includ includee inade inadequa quate te invest investme ment nt in education and other economic infrastructure, rapidly rising medical costs, and sizable budget and trade trade deficits.
Financial Risk:
The nation endured a deep recession throughout 1982. Business bankruptcies rose 50 percent over the previous year. Farmers Farmers were especially especially hard hit, as agricultural agricultural exports declined, crop prices fell, and interest rates rose. But while the medicine of a sharp slowdown was hard to swallow, it did break the destructive cycle in which th economy had been caught. By 1983, inflation had eased, the economy had rebounded, and the United States began States began a sustained period of economic growth. The annual inflation rate remained under 5 percent throughout most of the 1980s and into the 1990s. FINANCIAL RISK: Sequence
FI FINANCIAL COMPONENTS
A
Foreign debt as a % of GDP Foreign debt service as % of exports C/A as a % of exports Net int'l liquidity as months of import cover Exchange rate stability
B C D E
RISK
Maxi. Score
U.S.A
Japan
10
10
9
10
10
9
15 5
15 5
15 4
10 50
10 50
9 46
Very Low Risk
Very Low Risk
Total
Economic Risks: Sequence
ECONOMIC RISK Components
Maxi. Score
U.S.A
Japan
A B C D E
GDP per head Real GDP Growth Annual Inflation rate Budget balance as a % of GDP Current account as a % of GDP
5 10 10 10 15
5 10 9.5 9 15
5 10 10 8 15
Total
50
48.5
48
Very Very Low Low Ris Risk
Very Very Low Low Ris Risk k
28
Sequence A B C D E F G H I J K L
Political Risk Component Government Stability Socioeconomic Conditions Investment Profile Internal Conflict External Conflict Corruption Military in Politics Religious Tensions Law and Order Ethnic Tensions Democratic Accountability Bureaucracy Quality Total Label of risk
Points (max.) 12 12 12 12 12 6 6 6 6 6 6 4 100
U.S.A 12 10 11 11 10 3 6 4 5 5 6 2 85 Very Low Risk
Japan 12 11 10 11 11 4 6 4 4 5 6 3 87 Very Low Risk
Political risk:
Composite Risk Rating: CPFER = 0.5(PR+ER+FR) 0.5(PR+ER+FR) Category of Risk Political Risk Economic Risk Financial Risk Total CPPFER Risk level
U.S.A
Japan
85
87
48.5
48
50 183.5 91.75 Very Low risk
46 181 90.50 Very Low Risk
According to the ICRG rating system, U.S.A gets the highest score of 91.75 out of 100, Japan gets almost same score of 90.5 that is 1.25 less than U.S.A. However, these two countries get ‘Very Low Risk’ rating.
COUNTRY RISK IS LOW 29
Chapter 6 Prospective Analysis Assumptions of Method:
A seven year projection with sensitivities was computed by OL’s planning department. Future income and expenses were estimated for up to seven years based on 1996-1997 historical data. The following financial assumptions were made: 1. An initial initial capital capital investm investment ent in To Tokyo kyo Disney DisneySe Seaa park park ¥40 ¥400 0 billio billion n (US$ (US$3. 3.4 4 billion) will be made in in 2000
2. The number number of visitors visitors will will remain remain the same same during the the next four four years and will will increase 30% in 2002 when Tokyo DisneySea Park will be opened. They will increase 10% in 2003 and 2004. In 1997, the average admission fee per person was ¥10,421 (US$88.30). Given the deflationary climate, admission fees will increase by 2% annually during the four years after 1997, and will increase by 15% in 2002 at the opening of Tokyo DisneySea Park and will again increase by 10% in 2003. In 2004, admission fees will remain at the same rate as in 2003. If the new project p roject is not undertaken, the number of visitors will remain the same during during the seve seven n year year period period and admi adminis nistr trati ative ve fees fees will will incre increase ase by 2% annually over those seven years. 3. Openin Opening g cost cost other other than than depre deprecia ciatio tion n (67% (67% of sales sales,, the ratio ratio of 199 1997 7 data), data), adm adminis inistr trat ativ ivee expe expens nsee (7% (7%) and and othe otherr expe expens nses es (4% (4%) will ill incr increa ease se proportionately proportionately with the increase in sales. These projections will be applied despite OL’s decision to invite or not.
4. Depre Deprecia ciatio tion n of the ¥400 billion billion (US$3.4 (US$3.4 billio billion) n) investm investment ent in 200 2000 0 will will be conducted using the straight line method over 20 years.
5. Termina Terminall value= value= CF CF for the the fifth fifth year/ year/ discount discount rate rate
30
6. Funds borrowed as of 1997 totalled ¥23 billion (US$195 billion), for which interest payments in 1997 were ¥1 billion (US$8.5 million) (the debt interest rate is 4.34%). It was assumed that the cost of future borrowing would be 4.34% (the same as that in 1997). It was also assumed that for future investments, investments, twothird would be financed by the internal holding reserves and capital increases (inclu (includin ding g the issuan issuance ce of prefer preferred red stocks stocks)) and the oneone- third third would would be fina financ nced ed by borr borrow owin ings gs.. Th This is assu assump mpti tion on was was made made base based d on the the past past performance of the company. company.
7. The Japa Japanes nesee rate rate of taxat taxation ion was was 43%. 43%.
6.1 Valuation of the Oriental Land Without the Project Outcome: The valuation has been done using above mentioned assumptions
and the results are as follows in Million-
Enterprise Value
$5,148.25
Equity Value
$4953.25
Equity value per share
4.95
6.2 Simulation Analysis (by using Crystal Ball) Probability distributions are assign to each of this factors based on management’s assessment of the probable outcomes. Thus the possible outcomes are charted for each factor according to their probability of occurrence. Once Probability distributions are determined the next step is to determine the internal rate of return or NPV calculated at the risk free rate that will result from the random combination of the factors. This is how simulation analysis works.
Assumptions of Simulation: Assumption: Administrative expenses
Triangular Triangular distribu distribution tion with with paramet parameters: ers: Minimum 6% Likeliest 7% Maximum 8%
31
Assumption: Admission fees(US $)
Lognormal distribution with parameters: Location Mean Std. Dev.
0% 2% 0%
Assumption: Operating cost
Location Mean Std. Dev.
0% 67% 7%
Assumption: Other expenses
Normal distribution with parameters: Mean Std. Dev.
4% 0%
Assumption: Taxes
Lognormal distribution with parameters: Location Mean Std. Dev.
0% 43% 4%
Assumption: WACC
Lognormal distribution with parameters: Location 0.00% Mean 5.00% Std. Dev. 0.50%
Enterprise Value
32
Trials Mean Median Mode Standard Deviation Variance Skewness Kurtosis Coeff. of Variability Minimum Maximum Range Width Mean Std. Error
Forecast values 1,000 1,000 $5,172.27 $5,145.24 --$1,425.35 $2,031,636.3 4 0.0773 3.18 0.2756 $720.81 $9,866.34 $9,145.53 $45.07
Interpretation: From the simulation analysis, we can state that, the mean
enterprise enterprise value is 5172.27 5172.27,, whereas whereas the CV is 27.56% 27.56% which implies the low riskiness of the firm.
Equity Value
33
Interpretation: From the simulation analysis, we can state that, the mean
equity equity value is 4977, 4977, whereas whereas the CV is 28.64 28.64% % which which implies implies the low riskiness of the firm.
Trials Mean Median Mode Standard De Deviation Variance Skewness Kurtosis Coeff. of Variability Minimum Maximum Range Width Mean Std. Error
Forecast values 1,000 1,000 $4,977.27 $4,950.24 --$1,425.35 $2,031,636.3 4 0.0773 3.18 0.2864 $525.81 $9,671.34 $9,145.53 $45.07
Upside & Downside Risk in Enterprise Value 34
Enterprize Value Input Downsid Downsid Base Variable e Upside Range e Upside Case $6,841.5 $3,441.6 $3,399.9 Operating cost 8 0 9 59% 76% 67% $5,975. $4,611.9 $1,363.6 WACC 58 5 4 4.38% 5.65% 4.98% $5,551. $4,907.1 Taxes Taxes 88 7 $644.72 38% 49% 43% $5,352. $5,148.1 Other expenses 08 3 $203.95 3% 5% 4% Administrative $5,327. $5,173.1 expenses 08 3 $153.95 7% 7% 7% Admission fees(US $5,186.6 $5,323. $) 4 25 $136.61 2% 2% 2% Interpretation: From the tornado chart it can be observed that enterprise value is most sensitive positively with WACC and negatively with the operating cost.
Sensitivity Analysis:
35
Interpretation: As in the Sensitivity chart followed by this simulation graph shows that the enterprise value is most sensitive to the changes in operating cost and the sensitivity accounts accounts for 64.8%. Next to WACC WACC it is sensitive with discount rate.
Interpretation: As in the Sensitivity chart followed by this simulation graph shows that the equity value is most sensitive to the changes in operating cost and and the sensitivity accounts accounts for 64.8%. Next to WACC WACC it is sensitive with discount rate.
Chapter 7 Project Analysis 36
In 1997, Japan's Oriental Land Corporation and the Walt Disney Company, its licenser for Tokyo Disneyland, had intense discussions about the possibility of building an additional theme park called Tokyo DisneySea Park. The difference in the economic and political assessment of the project between the American and Japanese firm was the root cause of disagreement. disagreement. Japan and USA use significantly different capital budgeting techniques. The difference in decision making between Japanese and American firms also also refle reflects cts the differ differenc encee in corpor corporate ate gov govern ernanc ancee techn techniqu iques es betw betwee een n the two two countries. For example, the principles of discounted cash flow, such as the new present value (NPV) and the internal rate of return (IRR), are widely used outside the realm of Japanese corporate finance. Although familiar with these tools, Japanese executives rarely use them and often consider them invalid tools for the decision-making process. Instead, Japanese corporations have come to rely on the average accounting return method for their financial analyses. The reason behind Japanese businesses rejecting NPV and and IRR lies lies in Japan's socio-economic socio-economic conventions and the nation's history. history. Major theme parks problems
Theme parks as destination attractions – Problems to be addressed Need for larger larger site Traffic Large amounts of water required Seasonability in employment in most areas Disney Sea Park can overcome all the problem through its huge available land and Japan was an island country surrounded by seas. American corporate financiers differed greatl greatly y from from their their Japane Japanese se counte counterpa rparts rts in their their evalua evaluatio tion n of the ¥40 ¥400 0 billio billion n investment for the development of the Disney Sea Park in 2000. Using the American method, a positive NPV was calculated and the IRR was higher than the hurdle rate of OL. OL. Th This is sug sugges gested ted that that the Disne Disney y Sea Sea Proje Project ct was was an appro appropri priat atee and feasib feasible le inves investme tment. nt. Conve Converse rsely, ly, from from the perspe perspecti ctive ve of the tradit traditiona ionall Japane Japanese se averag averagee accounting return method, the rate of return was very low and even reflected negative figures. Using this method, the Disney Sea Park seemed neither attractive nor sensible. IBJ the main bank of OL’s tried to mediate the diverging projections. IBJ told OL that upon successful conclusion of the mediation between OL and WD, they would be interested in financing the project if the project analysis appropriately combined both the American and Japanese methods. With regard to the analyses, IBJ presented a third method which is average cash flow return method.
7.1 Valuation of the Oriental Land With the Project Outcome: The valuation has been done using above mentioned assumptions
and the results are as follows in Million37
Enterprise Value
$8354.20
Equity Value
$8159.20
Equity value per share
8.15
7.2 Simulation Analysis (by using Crystal Ball) Probability distributions are assign to each of this factors based on management’s assessment of the probable outcomes. Thus the possible outcomes are charted for each factor according to their probability of occurrence. Once Probability distributions are determined the next step is to determine the internal rate of return or NPV calculated at the risk free rate that will result from the random combination of the factors. This is how simulation analysis works.
Assumptions of Simulation: Assumption: Administrative expenses
Triangular Triangular distribu distribution tion with with paramet parameters: ers: Minimu m 6% Likeliest 7% Maximu m 8% Assumption: Operating cost Lognormal distribution with parameters: Location 0% Mean 67% Std. Dev. 7% Assumption: Other expenses Normal distribution with parameters: Mean 4% Std. Dev. 0%
38
Assumption: Taxes
Normal distribution with parameters: Mean Std. Dev.
43% 4%
Assumption: WACC
Lognormal distribution with parameters: Location 0.00% Mean 5.65% Std. Dev. 0.57%
Enterprise Value
39
Trials Mean Median Mode Standard Deviation Variance Skewness Kurtosis Coeff. of Variability Minimum Maximum Range Width Mean Std. Error
Forecast values 1,000 1,000 $8,467.43 $8,448.52 --$2,137.07 $4,567,064.2 8 0.1243 3.27 0.2524 ($306.28) $16,577.98 $16,884.25 $67.58
Interpretation: From the simulation analysis, we can state that, the mean
enterprise enterprise value is 8467.43, 8467.43, whereas whereas the CV is 25.24% 25.24% which implies the low riskiness of the firm.
Equity Value
Interpretation: From the simulation analysis, we can state that, the mean
equity value is 8272.43, whereas the CV is 25.83% which implies the low riskiness of the firm.
40
Trials Mean Median Mode Standard Deviation Variance Skewness Kurtosis Coeff. of Variability Minimum Maximum Range Width Mean Std. Error
Forecast values 1,000 1,000 $8,272.43 $8,253.52 --$2,137.07 $4,567,064.2 8 0.1243 3.27 0.2583 ($501.28) $16,382.98 $16,884.25 $67.58
Upside & Downside Risk in Enterprise Value
Variable
Enterprise Value Downsid Upside Range 41
Downsid
Input Up U psid
Base
e e e Case $10,869. $5,804. $5,065. Operating cost 65 29 36 59% 76% 67% $9,776.5 $7,377. $2,398. 6.39 WACC 5 80 75 4.95% % 5.62% $8,897.5 $8,099. Taxes 7 69 $797.88 37% 49% 43% $8,650.5 $8,346. Other expenses 6 71 $303.85 3% 5% 4% Administrative $8,613.3 $8,383. expenses 1 95 $229.36 7% 7% 7% Interpretation: From the tornado chart it can be observed that enterprise value is most sensitive positively with WACC and negatively with the operating cost.
Sensitivity Analysis:
Interpretation: As in the Sensitivity chart followed by this simulation graph shows that the enterprise value is most sensitive to the changes in operating cost and the sensitivity accounts accounts for 64.8%. Next to WACC WACC it is sensitive with discount rate.
42
Interpretation: As in the Sensitivity chart followed by this simulation graph shows that the equity value is most sensitive to the changes in operating cost and and the sensitivity accounts accounts for 64.8%. Next to WACC WACC it is sensitive with discount rate.
Chapter 8 Problem Analysis The problem statement in concise format can be listed as belowWhetherr Orien Oriental tal Land Land und undert ertake akess the projec projectt in curre current nt weak weak econo economic mic 1. Whethe condition? 2. Whether the company’s current profitability and earnings capability would be able to sustain the investment period? 3. Whether Disney Sea Park creates any non-financial benefit? 4. Is Tokyo Disney Sea Park brings success for both USA and Japan?
Solution of problem 1 Tokyo Disney Sea Park was to be a unique institution, a first of its kind in the world. Japan was an island country surrounded by sea and as such the Japanese had a strong attachment to a theme concerning the sea. The target audience was those adults who had been been childr children en when when To Tokyo kyo Disne Disneyla yland nd had been been introd introduce uced. d. Th Thee econo economic mic conditions in 1997 were weak, OL had to decide whether to undertake a project as large
43
as the Tokyo Disney Sea Park. To solve this problem we do scenario analysis based on with the project and without the project. There is calculated enterprise value based on changing the number of visitors in each year. The first scenario is-
If number of visitors will be decreased by 10% for the reason of economic
downturn in every year then what will be enterprise and equity value?
Probability Enterprise Value Enterprise Value (Without the Project) (With the Project) 10% 20% 30% 40% 50%
$3,072.82 $1970.09 $1,395.56 $1,106.26 $960.79
$3,838.20 $2,711.49 $2,125.23 $1,830.87 $1,683.65
Proba Probabi bili lity ty Equi Equity ty Val Value ue (Wit (Witho hout ut Equi Equity ty Value alue (W (Wit ith h the Project) the Project) 10% 20% 30% 40% 50% Here under first scenario the
$2,877.82 $3,643.20 $1,775.09 $2,516.49 $1,200.56 $1,930.23 $911.26 $1,635.87 $765.79 $1,488.65 enterprise value without the project is $3072.82 million
and with the project is $3838.20 million and the equity value without the project is $2877.82 million and with the project is $3643.20 million. We consider the probability of decreasing the number of visitors up to 50%. Under all scenario enterprise value and equity value with the project is higher than the without the project. So, Oriental Land undertakes the project in current weak economic condition.
Solution of problem 2 In 1997 1997 and and 1998 1998 the the net net inco income me and and cash cash flow flow are are posi positi tive ve.. An init initia iall capit capital al investment n Tokyo Disney Sea Park of ¥400 billion (US $3.4 billion) will be made in 2000. If the OL take the project, net income will will decrease but cash flow will increase. increase. The depreciation depreciation amount will be increased for the reason reason of investing a new project. In 2002 the number of visitors will increase for the Disney sea Park. In 2002 net income will increase more under new project than that of OL existing project and it will continue continue up to 2004. The net income income would show positive positive in 2000 and 2001. 2001. So the 44
company’s current profitability and earnings capability would be able to sustain the investment period. The new project will generate the income after 2003.
Without the project Depreciati on Income Cash flow
1997
1998
1999
2000
2001
2002
2003
2004
93.9
93.9
93.9
93.9
93.9
93.9
93.9
93.9
134.7 228.6
138.7 232.6
142.8 236.7
147 240.9
151.5 245.4
156 249.9
160.6 254.5
165.6 259.5
With the project Depreciati on Income Cash flow
1997
1998
1999
2000
2001
2002
2003
2004
93.9
93.9
93.9
263.3
263.3
263.3
263.3
263.3
134.7 228.6
138.5 232.4
142.8 236.7
22.5 285.8
29.9 293.2
134.4 397.7
201.6 464.9
240.9 504.2
Solution of problem 3 Stake holder’s position analysis in case of taking the project:
Most of the stake holders are opposing the proposed project of Tokyo Disneyland and the DisneySea Park as the licenser (Walt Disney Company) not giving anything. Walt Disney Company was not taking any risk but demanding a high royalty on admission fees and sales of foods and beverages. The points why most of the stake holders oppose the projects are given below:
Stake holder
Relationship
with Point of Objection
OL
1. Risk is not being shared with WD. Mitsu itsuii Rea Reall Est Estat atee Gro Group up
20.4 20.48% 8% owne ownerr of OL
2. 10% royalty is not rational. 3. Future is always uncertain. So a contract of 50 years does not
45
make sense. 1. No investm investment ent and and no risk IBJ IBJ and and Mit Mitsu suii Tru Trust st Ban Bank k
taking
Bank Banker er of of OL OL
by
WD.
So
collecting royalty fee is not justifiable. justifiable. American management and Japanese management Management Goals Strategies Main function
Japanese Firm Market share Long-term Production, Selling
American Firm Return on Investment Short-term and Finance & Planning
Organization Main Member Rela Relati tion on to to Sto Stock ckho hold lder er Business Transaction
R&D Organic Employees Open pen Mar Marke kett and and Kei Keire rets tsu u Long
Mechanic Stockholder Open Open mark market et and and fam famil ily y grou group p Short
Differences in American and Japanese corporate governance: governance:
There is a huge differece in American and Janpanese corporate governance culture. Because of these differences the decision changes in case of operating business and taking projects in America and Japan. The problem intensifies when a company from any of these countries operates its business in the other country. The differences in the corporate governance between between these two countries are given below:
Points of differences Corporate governance
system Board member Objective of of th the firm
In America Anglo-American type
Fewer than 15 More than 30 Maximizing re return of th the Maximizing corporate wealth shareholders
Capital
and
benifit
for
all
stakeholders Average Accounting Return
budgeting NPV, NPV, IRR
techniques Agency problem
In Japan Japanese-Ge -German type
(AAR) Agents (Managers) are Prin Princi cipa pals ls
(Sta (Stake keho hold lder ers) s)
likely to have their own themselves themselves can have different goals
goals 46
Term
of
value Short
term
value Long
term
maximization
maximization to meet the maximization
Employment strategy
market expectation Mostly temporary permanent permanent
is
but Mostly
permanent
value
but
also temporary is also available
available For these differences in corporate governances the decision is affected in Japan in case of taking projects like Tokyo Tokyo Disneyland Disneyland and DisneySea park. park. But its existing project project Walt Disney made profit despite hefty icensing fees that were an average 7% of sales. Although main stakeholder were not agreed but Tokyo Disney Land bring success. Tokyo Disney Sea Park can also create huge employment opportunity. The project will directly add new jobs as a result of its construction and operation. It will also induce new jobs as a result of income spent by workers filling these direct jobs, and and may, may, in addi additi tion on,, resu result lt in indi indire rect ct empl employ oyme ment nt,, to that that exte extend nd that that dire direct ct emplo employm yment ent leads leads to local local purcha purchase sess of mater material ialss and servic services. es. Th Thee additi additiona onall employment generated by the proposed project is a beneficial impact for job growth in Japan.
Solution of problem 4 $415.24 8.5% -1.05% 7.41`%
NPV IRR ARR ACR
The project project will be successful successful for both Walt Walt Disney and Disney Disney Sea Park. Park. There There is done financial feasibility study of the Disney Sea Park project. Using the American, a positive NPV was was calculated and IRR IRR is higher than the hurdle rate. rate. This suggested that the Disney Sea Project Project was an appropriate and feasible investment. investment. Walt Disney is also charged large amount of licensing fee. Walt Disney can collect a fixed amount of money from Disney Sea Park. Whereas Whereas Disney Sea Park represented a key part of OL’s strategic vision. This is needed to convince WD and OL’s stakeholders to commit to this new venture. The cash flow return method showed a return on the investment higher than calculated calculated under the traditional average average accounting return return method. IBJ is a main bank of OL and it would be interested in financing the project.
47
Recommendation Determining the risk and evaluating the project we come to the conclusion that
the project should be accepted.
The accounting cash flow return method method have fulfilled the threshold threshold except for the ARR
NPV and IRR have have also fulfilled fulfilled the thresh threshold old.. In Anglo Anglo-Am -Ameri erican can mark marke et, the the firm firms s hav have to stri striv ve to maxim aximiz ize e the the retu return rn of shareholder.
Cash flow with the project is higher than the cash flow without the project and net income with the project will be increased up to 240.9 million in 2004.
Enterprise value with the project is $8,354.20 which is higher than the
without the project In Japanese market a firm had to treat shareholder on a par with
other stakeholder, stakeholder, such as management, labor, suppliers, creditors, the local community and the government. In Oriental Land Banks hold 28.35% share of the company. IBJ is an OL’s main bank and it would be interested in financing the project. If the project will incur profit, creditor as well as government will be benefitted. benefitted. This project project focus on long long term stakeholder stakeholder wealth wealth maximization maximization 48
49
