Walt Disney Company's Yen Financing
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Im reading this case for one of my classes and need some help with these questions for class and group disscussion which is a huge part of our grade for the course. Any help will be very much appreciated.
"Walt Disney Company's Yen Financing"
1. Should Disney hedge its yen royalty cash flow? Why or why not? If so, how much should be hedged and over what time frame?
2. Assuming a hedge is desirable, what hedging techniques are available to the treasurer and what are the advantages and disadvantages of each?
3. In light of the various other techniques for hedging currency exposures, why does a market for currency swaps exist? Who benefits and who loses in such an arrangement? Can a swap really create value for a corporation, and if so, where does the value come from? What risks does a swap carry for the various parties involved?
4. Evaluate Goldman's proposal for an ECU bond issue accompanied by an ECU/yen swap. How does its "all-in" yen cost compare to that of the proposed yen term loan? Is it superior to hedging using outright forwards? (Note: "all-in" cost generally refers to that discount rate which equates the present discounted value of the future debt service payments with the financing proceeds less front-end fees [i.e. the internal rate of return], expressed as an annual rate).
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1. Should Disney hedge its yen royalty cash flow? Why or why not? If so, how much should be hedged and over what time period?
Yes, Walt Disney Company should hedge its royalty cash flow to protect against currency fluctuations. The company has revenues in Yen and does not have expenses in Yen. Thus it would be converting the Yen to Dollar and so is exposed to foreign exchange risk. The value of Yen has declined recently and it is difficult to forecast what the value could be in the future. Also currency speculation should be left to speculators and Disney should not play on the exchange rate. It would be wise to reduce the risk due to changes in exchange rate. The royalty receipts form a significant part of the pre tax income of Disney and any adverse movement would impact the financial position of Disney.
The maximum amount and the period should be the Yen royalties that accrue to Disney. At the moment the amount is Yen 8 billion. The royalties are expected to grow for all times in the future and so the hedging should be for the maximum maturity available which is 10 years. At the minimum, Disney may Disney may want to take enough money so as to reduce the debt to capitalization ratio back to 20% which now stands at 32%.
The expected yen revenue stream of more than ¥8 billion every year would create
2. Assuming a hedge is desirable what hedging techniques available to the treasurer? What are the advantages and disadvantages of each?
The various hedging techniques available and the advantages and disadvantages are :
1. Currency Options - In this Disney could buy dollar yen options allowing Disney the right to buy dollars against yen at a predetermine rate or could sell Put options allowing Disney to sell yen for dollars at a predetermined rate.
The advantages of options are
? It gives the right but not the obligation. If the Option is out of the money it need not be exercised.
? Options have an unlimited upside but limited downside so will help Disney benefit from ...
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