SUGESTED ANSWERS TO EURO DISNEYLAND
1. These questions relate to the $800 million (FF 4.8 billion at FF 6 – $1) in French government-subsidized loans.
a. What is the value to Disney of the French government’s loan subsidies?
ANSWER. According to the case, the FF 4.8 billion in government loans carry an interest rate of 7.85%. The loans
have a ten-year amortization schedule, with interest only for the first five years and repayment over the next five
Year
1
Loan Balance at
End of Year
(1)
FF 4,800,000,000
Value of Interest
Subsidy
(2) = .014 x (1)
FF 67,200,000
PV Interest
Factor at 9.25%
(3)
0.9153
PV of Interest
Subsidy
(4) = (2) x (3)
FF 61,508,160
b. What exchange risk is this project subject to from the standpoint of Disney? How can financing be used to
mitigate this exchange risk?
ANSWER. Clearly, changes in the franc:dollar and DM:dollar exchange rate will affect Disney’s dollar cash flow
from EDL. When the dollar appreciates, the dollar value of EDL’s operating cash flow will drop. Presumably
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c. Suppose it turns out that having $800 million in francs financing actually adds to Disney’s economic exposure.
How could this affect Disney’s willingness to accept the full amount of financing offered by the French
government?
ANSWER. Even if borrowing $800 million in French francs actually adds to Disney’s economic exposure, as in the
2. Based on purchasing power parity, project the dollar:franc exchange rate from 1989 through 1996.
ANSWER. Given an exchange rate at the end of 1989 equal to FF 6 = $1, or FF 1 = $0.16667, and annual French
3. What is the range of projected dollar net income for Euro Disney for the years 1992-1996?
ANSWER. The only variation for which we have figures arises from attendance. According to the case, attendance
4. Suppose the terminal value at the end of 1996 is estimated at seven times net income for 1996. Using a 15%
cost of capital what is the range of net present values of Euro Disneyland as a standalone project?
ANSWER. Exhibits 1 and 2 show all work associated with calculating the range of project NPVs. The analysis is
performed assuming that the 15% cost of capital applies to the $1.5 billion equity portion of the investment in Euro
5. Using the same 15% cost of capital, what is the range of net present values of Walt Disney’s investment in
Euro Disney?
ANSWER. According to Exhibit 3, the NPV of Euro Disneyland to Walt Disney, based on its $500 million estimated
6. Should Walt Disney go ahead with this project? What other factors might you consider in estimating the value
of Euro Disneyland to Walt Disney?
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ANSWER. Although Euro Disneyland looks marginal at best from the standpoint of conventional net present value
analysis (as presented in Exhibit 3, but without the additional considerations presented in the answer to question 5),
the EDL project provides Walt Disney with substantial profitable growth options. Disney’s options include the right