Firm Value and Marketability Discounts - Essay Example

? The Federal Reserve of the Question Indicate the type of debt did Disney offers to the public for sale and discuss the various approaches Disney incorporated to ensure successful marketability of these securities Answer Walt Disney Company also called Disney is an American company in the mass media industry. It is the largest conglomerate in media industry in terms of its revenue. In this section of the study, the discussion would be regarding the debt that Disney offered to public for sales and the marketability strategies of the company to make it a success. Disney issued its first batch of floating rate notes in the year 2007. Floating-rate notes are debts that reimburse the investors a rate of interest that is reset in every quarter. Disney was one of the companies in the small club, which could sell its debts below the London interbank rate (LIBOR) (First Share, 2008). The floating-rate debt notes assist the companies to trade bonds which are attached to different benchmark other than that of US Treasury. It offers diversity for customers cautious of increasing interest rates. Issuing Floating-rate notes is a way to hedge the risk against the interest rates that arises while abiding to be in corporate. The company also planned to promote stock ownership which is for long-term to the existing as well to the new investors, so they developed an investment plan to offer customers Disney’s common stock which will also provide the existing investors of Disney to re-invest their dividends. Two-year notes were sold by Disney that could yield one basis point in a pan of less than three moths LIBOR. These securities were rated as A2 by the Moody’s Investors Service and Standard & Poor’s rated it as A. The last floaters were sold by Disney was in April 2008. However, the last debt was sold by the company in November, which assisted the company to raise $3 billion. Disney sold their debt at a record amount because the interest rates were the lowest. The company issued bonds amounting to $3 billion and it was the considered to be the fourth part of their coupons. This issue was considered to be the biggest in the 89 years history of the California based company called Burbank (First Share, 2008). Since The Federal Revenue in US has been absorbing around 90 percent of the government bonds, scarcity in treasure can be felt. The Fed as well as the Obama administration assisted the customers as well as Walt Disney by keeping the borrowing cost low, so that the company can raise funds successful from its debt instruments. Apart from this, the company also lured its customers by revealing a strong financial status of the company and a prospect of growth in future. The investors go for acquiring those securities which are readily marketable than the identical assets that are not easily marketable. The genera; cash flow methods cannot be utilized for making securities marketable (Bajaj, Denis, Ferris, & Sarin, n. d.). When securities are not marketable, companies apply a discount to the estimated value for making them acceptable to investors. The concept of marketability lies in the fact that how quick the debt or asset can be converted to near cash or cash, without any transaction cost to be borne by the owner. Even when an individual wishes to convert the common stock into cash, it can be easily done by incurring a minimum transaction cost and there would be minimum impact on the market price (The Walt Disney Company, 2008). Question 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 It has been already discussed in the first part of the study that Disney issued two-years floating-rate notes which amounted to around $800 million. The company initially planned to offer $500 million, which increase to $800 in the next five years (Gangar, 2013). The last sold floater, which was a three year debenture, amounted to around $93.3 million. In this segment, the discussion would be related to the list of dollar amount of Disney’s debt that probably the company sold (McGee, 2013). In 2008, the company issued commercial papers, which considered of US medium term as well as convertible senior notes and European medium-term notes among the major once. The value of the commercial papers was around $$1,985 in the year 2008. Among these the US medium-term notes was on the basis of floating interest rates and amount to $7,005. In the year 2008, the company has around $2.0 billion commercial papers and also bank facilities that amounted to around $4.5 billion in total, of this half of them were to expire by 2010, so they were issued at LIBOR based spreads. However, half of them had validity till 2011 (Gangar, 2013). The company had the ability to issue letters of credit up to the amount of $800 million, so they by September 2008, the company issued letters of credit amounting to around $368 million. There were no sales of commercial papers in 2009, while the sales of US medium term notes amounted to around $7618. The company did not have any commercial paper as outstanding as it had bank facilities amounting to $4.5 billion to support the borrowings. In 2010, the cash that was utilized in the fiscal financial activities decreased by around $398 million as compared to $2.9 billion in 2009 because in order to repay the borrowings, the company repurchased the common stocks and partial payment of dividend were done (First Share, 2008). This decrease was probable due to the lower borrowing repayments which was also because of increased proceed from the stock options amounting to $3.1 billion in comparison to 2008’s repayment. In 2010, again commercial papers were outstanding amounting to $1.2 billion. The company also issued a shelf registration statement, which allowed them to issue diverse debt instruments such as floating and fixed notes along with other debt instruments (McCormick, & Kruger, 2012). Since financial 2005, Walt Disney had plans of financial restructuring, which required increasing capital and refinancing the borrowings. Due to this financial restructuring, they considered long-term debt instruments for attaining an initial liquidity need of approximately $135 million, which varied with passing years, increased operation and expansion of offerings. The increasing sales of debt instrument were due to different reasons associated with expansion of the business (McGee, 2013). Disney acquired around 24 percent of stake of UTV Software Communication Limited (UTV) for around $197 million. In December 2008, it acquired an additional 26 percent of Jetix Europe for an amount $354 million. These examples prove that the company required funds for financing the acquisitions and other operations (Bajaj, Denis, Ferris, & Sarin, n. d.). Question 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 The common stocks of Disney that were sold on the New York Stock Exchange in November 2008 were for $19.94 per share. Apart from the share price, the investors also had to pay brokerage commission of $0.01 per share and other associated fees. As already discussed the owners of the marketable securities have to bear transaction cost for holding them and also converting them into cash. Now as far as the floating-rate notes are concerned, the interest rates were fixed as 0.01 percent less that the LIBOR rates, which were 0.30 percent now, but probably below 0.52 percent by then. Disney tried to keep the discount rates low for increasing the value of the obligations (The Walt Disney Company, 2009; 2010; 2011). The discount rate by the end of 2008 was 7 percent and an increase in the discount rate was expected which would affect the market rates of the corporate bonds. The discounts offered are not subjected to the taxation framework of US but become taxable. Discount was offered by the company on the par value of the debt instrument and it is nothing but the difference that was between the redemption price and issue price (First Share, 2008). The discount brokers of the company do not generally maintain the inventories for the bond investors. So if the public wanted to procure certain debt instrument, then they have to purchase different dealer, but they want to sell the bonds then the traders ask for bids from other dealers (The Walt Disney Company, 2009; 2010; 2011). The discount rates were assumed to reflect the high-quality of the bonds and it was determined with regards to the pension yield curve. It reflected the matching plan of the liability cash flows with respect to the yield curves. 1 percent of decrease in the discount rate would increase the net periodic post retirement medical expense and pension in the year 2009 by approximately $120 million. This would lead to a projected profit obligation of around $968 million. On the other hand, 1 percent increase in the discount rate would have decreased the amount by $74 million (First Share, 2008). The company increased their discount rates in 2008 from 2007, which was 6.35 percent, which signifies that it will result in the same way as discussed above. There was a decrease in the fiscal 2009 because of the increase in discount rates in 2008 on corporate bonds. The company expected a decrease in expenses due to their decision to decrease the discount rates in 2009. The discount rates and expected return are considered to be the major critical elements for liability measurement and expense, so in order to realize revenue the discount rates were decreased (The Walt Disney Company, 2009; 2010; 2011). Question 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 According to the prospectus of Walt Disney, 2008 an investment plan was developed by the company to initiate a direct stock procurement plan through which the common stocks of the company would be sold. This common stock would be sold to the existing shareholders as well to the new investors. An initial cash investment would be made by the company of around $250 million. The cash dividends would get automatically reinvested in this case and the investors can even make additional investments from $50 onwards. The investors taking part in plan may sell off any portion of their common stock, but they are subjected to pay certain fees for purchase as well as sales of their shares. These common stocks were listed on the exchange in November 2008 (The Walt Disney Company, 2009; 2010; 2011). Apart from this the commercial papers and floating notes were also issued by the company in order to raise funds. These funds were raised for the purpose of meeting the requirements of acquisition, expansion of business and also for mitigating various expenses associated with smooth functioning of the company. As already discussed, Disney has been able to utilize the proceeding as planned because the financial statements issued by the company during and after the financial downturn revealed that the company has been able to strongly hold its position in the challenging situation. The financial disciplines were maintained and the company has been successful in clinging to its core strategies of maintaining a strong balance-sheet. It was also significant that the return on the invested capital were adequate and satisfying (The Walt Disney Company, 2009; 2010; 2011; First Share, 2008). The company has a good financial track over the years and aims at maintaining it in the coming years, which signifies that it has the capability to handle risks in the turbulent economic situation. The company is functioning ethically to raise funds from investors in order to meet certain objective, which it has been doing time to time. This signifies that there is no requirement of holding Disney responsible for any unethical practice against investors. The company in fact kept its interest rates even during the financial crisis in order to offer its investors space if they are frisky in taking risk. This shows that the company was confident about their scheme (The Walt Disney Company, 2009; 2010; 2011). The investor’s interest is protected by the management because internal control norms for monitoring the financial reporting, policies and procedures. The purpose of the company was to promote the long-term ownership of stocks for the new as well as existing investors, through the purchase of shares and reinvestment of cash dividends on common stocks. This plan was administered by Disney Shareholder Service Department. This signifies that debt instruments sold to the investors for the assumed purpose was undertaken by the company in a span of five years, which was considered for selling the different debt instruments (First Share, 2008). References Bajaj, M., Denis, D. J., Ferris, S. P., & Sarin, A. (no date). Firm value and marketability discounts. Retrieved from: http://people.stern.nyu.edu/adamodar/pdfiles/articles/firmvalueanddiscounts.pdf Gangar, S. (2013). Walt Disney sells $800 million of two-year floating-rate notes. Retrieved from: http://www.bloomberg.com/news/2013-02-12/walt-disney-said-to-plan-first-floating-rate-debt-since-2008-1-.html McCormick, L. C., & Kruger, D. (2012). Treasury scarcity to grow as fed buys 90% of new bonds. Retrieved from: http://www.bloomberg.com/news/2012-12-03/treasury-scarcity-to-grow-as-fed-buys-90-of-new-bonds.html McGee, P. (2013). Disney sells $800 million of floating-rate debt. Retrieved from: http://online.wsj.com/article/BT-CO-20130212-714317.html First Share. (2008). The Walt Disney investment plan. Retrieved from: https://firstshare.com/companies/prospecus/Disney%20prospectus.pdf The Walt Disney Company. (2008). The Walt Disney Company fact book. Retrieved from: http://cdn.media.ir.thewaltdisneycompany.com/2008/annual/factbook-2008.pdf The Walt Disney Company. (2009). Annual financial report and shareholders letter: 2009. Retrieved from: http://cdn.media.ir.thewaltdisneycompany.com/2009/annual/WDC-10kwrap-2009.pdf The Walt Disney Company. (2010). Annual financial report and shareholders letter: 2010. Retrieved from: http://cdn.media.ir.thewaltdisneycompany.com/2010/annual/WDC-10kwrap-2010.pdf The Walt Disney Company. (2011). Annual financial report and shareholders letter: 2011. Retrieved from: http://cdn.media.ir.thewaltdisneycompany.com/2011/annual/WDC-10kwrap-2011.pdf Read More