Walt Disney and Pixar Case Study Solution
Overview
Walt Disney intends to acquire Pixar as itwants to know the value of Pixar and itsown so that itcan understand that either the acquisition will destroy itscurrent value or not. By analyzing the value of Walt Disney and Pixar we can conclude either the acquisition is suitable for Walt Disney or not.After this calculation we can also estimate the value which should be paid to acquire Pixar. Furthermore, by combining the results of two companies we can estimate the future position of bothcompanies.
Pixar Valuation
We can evaluate the performance of Pixar by forecasting the income statement of the company for next 10 years and by calculating Free Cash Flow method we can estimate the fair value of the company.
Projected Income Statement:
There was an agreement being considered in which the operational activities and their financing would be done by Disney as currently under the fixed term agreementPixar is not involved in animated films.
Pixar will receive its share of revenues after the process of distribution and participation charges are made to Disney. This will give some income to Pixar but this option is not considered to be feasible as Pixar would not be involved in the operations.
Walt Disney and Pixar Harvard Case Solution & Analysis
FCF valuation of Pixar:
Due to no involvement of Pixar in the operations, its free cash flows are not of huge amounts and are not significant as they should have been. The total value of Pixar using the free cash flow method through the multiple of EBITDA will be approximately $5819.
Walt Disney Valuation
Projected Income statement of Disney:
The financial performance of Disney is better if compared to Pixar because Disney had the control of operation and was also responsible for the financing of the project.
FCF valuation of Disney:
Disney is better than Pixar because as the company is receiving a greater sum of revenue than its costs and that’s the reason why Disney will be more profitable than Pixar.
Valuation of both Pixar and Disney:
The valuation of Disney company is $163091 and the valuation of Pixar is $5819.It is evident from the values that the valueof Disney is higher than the value of Pixar and this shows that Disney is progressing better than Pixar and this huge value being placed upon Disney could be due to the project which was being operated and controlled by Disney.
How toget Risk-Free rate, Beta and WACC without Bloomberg terminal
Beta
The beta equity of the company measures the risk of the company.If the beta equity is above 1 then the company has more risk attached to it than the market and the shareholders will demand return accordingly. If the beta of the company is below 1 then it is less risky than the market and if the beta equity of the company is equal to 1 then the risk of the company is same as market risk.If the asset beta of the industry is adjusted for the company’s beta equity by incorporating the capital structure of the company to the beta asset, then it will generate beta equity.
Risk free rate:
The risk free rate is the yield on the 10-year government bond which is considered to be risk free. Similarly, rf is used in the calculation of the cost of equity using the CAPM formula.
WACC:
The WACC of the company is calculated by multiplying the cost of equity with the equity weight and multiplying the cost of debt with the debt weight assuming that the company raises funds from debt and equity only. If there are more sources, then the WACC will incorporate those costs too.
If Pixar is expensive or not:
The value through free cash flow method of Disney is $163091 and after acquiring Pixar it will be $172770. Disney would have avalue of $172770 which is not considered to be a good value addition as the company has current valuation of $163091 and approximately $9000 will be added to the value of the company.So, Pixar is considered to be too expensive to be bought by Disney.
Both companies have different operations as one company i.e. Disney is involved in the production of animated films whereas Pixar is involved in adult fiction films. The companies have different cultures too.
If Disney gives some control to Pixar, then Pixar will be more inclined to take effective decisions in the company and this will in turn increase the valuation and revenue of the company.................
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