Euro Disneyland Case Study
1. INTRODUCTION: The primary objective of this case analysis is to evaluate the proposed Euro Disneyland (EDL) project by applying Capital Budgeting techniques such as Net Present Value, analyze financial and economic risks, measure exposures of Euro Disneyland (EDL) such as economic exposure, transaction exposure and translation exposure, and develop strategies to mitigate these exposures. The case findings reveal that Disney should invest in Euro Disneyland taking into account the benefits arising out of French government subsidies and …
2. BACKGROUND: In 1984, Disney management decided to develop a European theme park On March 24, 1987, the Walt Disney Company entered into the “Master Agreement” with the …show more content…
3.2.1 Interest Subsidy
The interest subsidy is the major source of value to Disney. According to the exhibit 1, the present value of the subsidy at the end of 10 year period discounted at 9.25% will be equal to FF 36733547.33 or $ 6122257.89. The French government agency will be granting FF 4.8 billion in government loans that carry a fixed interest rate of 7.85% in contrast to normal commercial rate of 9.25%. The interest subsidy is 1.4% (9.25%-7.85%).The loans have a ten-year amortization schedule, with no principal repayment for the first five years. However, the repayments have to be made @ of FF 960 million each year. 3.2.3 Land Cost Subsidy: Disney has a right to buy 4800 acres of land at a rate of $7500 per acre as compared to $ 750,000 per acre. The chunks of the land can be sold to other developer. The acreage is expected to rise as soon as high speed rail lines from Paris to London are in place.
3.2.4 Management Fees: Disney will demand fat management fees. If the operating cash flows exceed any limits, Disney will collect a certain percentage of operating cash flows as management fees,
4.0 RISK DUE TO EXPOSURE
4.1 Economic exposure
4.2 Transaction exposure
4.3 Translation exposure:
This is caused due to exchange rate movements due to sale and purchase of assets, borrowings (FF 800 million), and credit extensions etc.
4.3.1 Exchange rates: The projected exchange rates are calculated according