Walt Disney prospectus - Essay Example

? WALT DISNEY PROSPECTUS Indicate the type of debt did Disney offers to the public for sale and discuss the various approaches Disney incorporatedto ensure successful marketability of these securities. Answer: In order to leverage the balance sheet, Walt Disney decided to offer unsecured notes to public for sale which is expected to increase the company’s profitability. The plans for investment in the company via debt were rolled out so as to offer the customers with suitable alternative investment scheme to invest in the company. The unsecured debt was issued under the existing agreements and the same was expected to be in line with the existing debt prevailing then. It is important to note that unsecured debt notes issued to public involves significant amount of risk for the company as well as the investors. This is because from the perspective of the customer, the interest rate may be too expensive. As a result, if the company is unable to generate sufficient profits, the company’s cost of borrowings will eventually exceed the revenues which will further increase financial risk of the company. The company has however kept these issues in mind and taken appropriate measures to minimize the impact of such undesirable consequences that might be followed after issue of unsecured debt by making the offer more attractive to customers. The company believed that if the offer would be attractive then more people will be encouraged to participate which will further ensure successful marketability of these securities. One of the initiatives taken by the company to increase the marketability of the securities was to reduce the entry load for joining the scheme. The minimum number of units required to subscribe by the people in order to join the scheme was reduced to five. In order to make the offer more attractive, the company allowed public to subscribe five units of shares at two hundred and fifty dollars for non-shareholders and they would be allowed to invest as low as fifty dollar per month. The company even kept the option of cash investment open for the investors. The company also lowered enrolment fee at an affordable price of $5-$10 per investor (Reuters, 2012). 2. List the dollar amount of debt Disney proposed to sell to the public. Indicate whether this amount has increased or decreased from 2008 to 2010. Discuss some potential causes of this increase or decrease. Answer: Walt Disney has sold bonds worth three billion dollars at the end of 2012. In the year 2011, the company has sold 5, 10, and 30 years bonds with historically low coupon rates consequently increasing the price of bond in markets (Financial News, 2011). This was one of the measures taken by the company to control coupon rates which were historically high during 2010. The issue of unsecured notes has experienced a steady decline from the period 2008 to 2010. The declining trend touched the lowest value in 2010 which continued till 2011. From the above discussion it can be said that a number of financial factors influenced the decision regarding decrease in amount of debt sold by the company to public. One of the reasons for such decline was the company’s decision to offer debt was the offer to lower coupon rates creating an opening for the company to cash in and make profits. The company took advantage of lower interest rates to maximize profits and expected the issue of bond to yield at least $1.5 billion which the company plans to utilize for corporate purpose. 3. Determine the percentage of the sales price Disney nets after discounts and commissions. Indicate whether this amount as decreased or increased from 2008 to 2010. Discuss some potential causes of this increase or decrease. Answer: Walt Disney has been able to net sufficient percentage of sales price after discounts and commissions on the issue of sale of debt instruments. In the year 2008, the company reported 57% percentage of sales price whereas the percentage declined to 46% for the year 2010. The decrease in the amount of debt issued by the company and the consequent decline in the percentage of sales price of Disney can be attributed to a number of factors including a significant drop in the interest rates. Thus, the only option left for the company to increase profitability after lowering interest rates was increase the number of investors who would be interested to subscribe to the bonds issued by the company. But from the data regarding decline in sale of bond sale from 2008 to 2010 indicates that public was not motivated enough to participate in buying the company’s bonds. The strategy of lowering rates to increase volume of bond sale finally paid out in the year 2011, when the company was able to raise project $1.61 billion that was later announced to be used for corporate purposes. 4. Indicate what Disney stated they would use the proceeds for from the sale of securities. Discuss whether or not Disney was able to use those funds for the reasons stated in the prospectus. If not should Disney be held accountable by their investors? Why or Why not? Answer: Walt Disney stated that the proceeds realized from the sale of securities would be used to finance general corporate purposes. The company’s objective of utilizing the proceeds from sale of securities was succeeded to certain extent in the sense that the company successfully bought Lucas film and the deal was valued about $4 billion. Hence, from the above it can be said that Disney was unable to completely use those funds for the purpose stated in their prospectus and the company should be held accountable to the investors for the same. This is because, as mentioned in the prospectus, the proceeds should have been used to retire debt instead of buying new assets, especially when such purchases were not essential. Accordingly, if the proceeds would have been used to repay debt, then the financial risk of the company would have declined and the investors would have realized higher value of shares from debt-free capital structure (Reuters, 2013). References Financial News. (2011). Walt Disney Sets Low-Coupon Records with Debt Offer. Retrieved from http://www.efinancialnews.com/story/2011-08-18/walt-disney-lowest-coupon. Reuters. (2012). Fitch Rates Walt Disney Co Proposed Offering. Retrieved from http://in.reuters.com/article/2012/02/09/idINWNA981720120209. Reuters. (2013). Fitch Rates Disney’s Proposed Offering ‘A’. Retrieved from http://www.reuters.com/article/2012/11/27/idUSWNA008620121127. Read More