University Finance Case Study: Discounted Cash Flow Valuation

This finance case study analyzes the valuation of a company using the discounted cash flow (DCF) approach. The analysis begins with an income statement and cash flow statement for Walt Disney over a five-year period, providing the basis for projecting future cash flows. The student used net cash flow from operating activities. The projected cash flows are then adjusted by a 5% growth rate. The case study provides detailed calculations of the present value of cash flows, the weighted average cost of capital (WACC), and the residual value to arrive at a final company valuation of $347,182.76 million. The analysis also includes working notes for residual value and WACC calculations, along with relevant references to support the methodology and assumptions used. The study addresses the components of the income approach as required in the assignment brief.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Contents
Discounted cash flow approach:......................................................................................................2
References:....................................................................................................................................10

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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.

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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

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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. 2,301. 2,371. 2,939. 2,981.

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00 00 00 00 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

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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
33
4.00
(1,573.
00)
Compensation on stock basis 408
.00
41
0.00
393
.00
36
4.00
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)
18
8.00
292
.00
68
2.00
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

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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
16,54
7.03
17,
374.39
Present value factor @5.44% 0.94
84 0.8995
0.8
531
0.
8091 0.7673
Present value of cash net operating
cash flows
13,556.
48
13,
499.91
13,443.
57
13,38
7.47
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:

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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
15,627.0
0
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
35,661.8
0
Dividend 1,508. 3,063. 2,313. 2,445. 2,515. 2,368.

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00 00 00 00 00 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

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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