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Analysis of the Walt Disney Company

Report by Valanium Analysts: Juan Calderon, Sergio Delgado, Andre Oliveira, and Juan Paiz

Investment Recommendation: MARKET PERFORM December 3,2001 DIS – NYSE (12/3/01) $20.47 52 week range $15.50 - $34.80 Revenue (2001 Unaudited) $25,256 Million Market Capitalization $42,762 Million Shares Outstanding 2,089 Million Dividend Yield (2000) 1.01% Avg Daily Trading Volume 10,605,954 Book Value per Share $11.98 (09/01 un audited) Return of Equity 3.8% Return on Assets 2.0% Est. 5 Years EPS 16.78% Growth Rate (2002-2006) Industry Entertainment – Media Conglomerate

DIS S&P 500

EPS Forecast FYE 09/30 2002E 2003E 2004E 2005E EPS $0.62 $0.75 $0.86 $1.02 Ratios Firm Average of Competitors Forward P/E 32.78 45.98 Forward PEG 1.95 4.19 M/B 1.84 1.23 Valuation Predictions

Actual Current Price Current Price $ 20.47 P/E Valuation $ 28.71 PEG Valuation $ 43.92 M/B Valuation $ 14.02 EBO (Abnormal Earnings) Valuation $ 5.86 DCF Valuation $ 17.87 Performance of DIS Trailing 6 mo 12 mo 24 mo Return on Disney -54% -29% -14% Return on S&P 500 -17% -13% - 09% Return on Competitors -52% -14% -24%

• Slow economy, lower advertising expense and decrease in tourism given September 11 attacks are

affecting the company performance and will continue to do it trough 2002. • Competitors have stronger ratings and thus are better positioned to defend their market share on

advertising • Our DCF valuation of 17.87 implies an overvaluation of the company. The P/E valuation implies it is

slightly undervalued. We believe the company is fairly valued unless the economy and Disney results deteriorate.

• The company has showed strength in its cable operations, if investments in ABC produce better programming for next year we could see an upside for the stock at the end of 2002, beginning of 2003

• Content creation as well as the big digital library the company owns provide the company with future options that can result in revenue streams

Rating System: BUY: A strong purchase recommendation with above average long-term growth potential. MARKET OUTPERFORM: A purchase recommendation that is expected to marginally outperform the return of the market. MARKET PERFORMER: A recommendation to maintain current positions with returns to match that of the market. SELL: A recommendation to sell the security (or short the security) as it is expected to decrease in price in the medium term.

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1. Company

The Walt Disney company is one of the largest media and entertainment conglomerates (#2 behind AOL Time Warner), with operations covering four key businesses: Media Networks, Studio Entertainment, Parks and Resorts, Consumer Products.

• Media Networks: it has two categories, Broadcasting and Cable Networks. Broadcasting units includes the ABC Television Network (#3 behind NBC and CBS). Cable Networks includes the ESPN-branded cable networks, Disney Channel, Disney Channel International, stakes in E! Entertainment and Lifetime and the start-up cable operations, such as Toon Disney and SoapNet.

• Studio Entertainment: The Studio Entertainment segment produces a wide variety of

movies, television animation programs, musical recordings and live stage plays. It also engages in the theatrical, home video and television distribution of Disney’s film and television library. It includes banners such as Walt Disney Pictures, Touchstone, Buena Vista, and Miramax.

• Parks and Resorts: They are the most popular in the world, including the Walt Disney

World resort in Florida (#1 park in US, 15.4 million visitors per year), the Disneyland Park and two hotels in California, and the Disney Cruise line operated out of Port Canaveral, Florida. The segment also generates royalties and/or management fees on revenues from Tokyo Disneyland (16.5 million people per year) and Disneyland Paris.

• Consumer Products: it licenses the company’s characters to consumer manufacturers,

retailers, and publishers throughout the world. The company also works in direct retail using The Disney Stores, and produces books and magazines in the US and Europe. The company also produces audio and computer software products, film, video and computer software products for the educational marketplace.

2. SWOT (Strengths, Weaknesses, Threats, and Opportunities) Analysis: 2.1 Strengths, Weaknesses - Competitors The Walt Disney company has beaten the S&P 500 for the past 16 years (3x) but has had problems to repeat the performance in the past 5 years. Disney’s brands are one of the strengths of the company together with their core capability of content creation. Additionally the digital library owned by the company gives them an important source for TV programming or DVD creation. We will describe its competitors (AOL and Viacom are the main ones, but Fox, Sony and Six Flags can be considered also as competitors to Disney):

• AOL Time Warner (#1, Media Entertainment Conglomerate) o AOL internet service is leader in the market, advertising in this sector is

more resilient than it seems o Filmed entertainment group has continued to show strong revenues. o Networks group (especially HBO and Turner) have implemented cost

saving measures and keep strong subscription revenues.

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• Viacom (#3, Media Entertainment Conglomerate): o Cable Networks keep their strength and are oriented towards an important

demographic group o CBS has outperformed the other main competitors in the last season o Viacom has been able to keep better prices for advertising than the

competition given its ratings. o Blockbuster’s gradual switching from VHS to DVD is expected to

generate higher margins • Six Flags (regional theme park operator).

o The 38 parks it operates had attendance of nearly 46.4 million in 2000. o The Company also owns an exotic wildlife and marine park.

• Fox Entertainment Group Inc (multi- faceted entertainment company)

o It has operations in filmed entertainment o A strong participant with Television Stations, Television Broadcast

Network and Other Television Businesses o Producer of cable network programming.

• Sony Entertainment Pictures

o Sony Corporation works in the development, manufacture and sale of electronic equipments.

o It also produces and markets entertainment products and instruments. o The Company is also in the business of motion picture production and the

insurance and banking businesses. 2.2 Threats - Risks

§ Decline in the advertising market that extends well into 2002 or beyond Affecting the

profitability of Media Networks (60% of Disney Revenues, with many advertising driven units such as ABC)

§ A slower economic recovery than expected (middle of 2002) can affect investments in 2002 and 2003, affecting the CAGR expected for the next 5 years.

§ September 11 events can affect Parks and Resorts operations deeper and longer than initially expected.

§ The cutting costs strategy can affect the quality of Disney products, affecting the brand and revenues growth. Nevertheless Disney plans to make investments to strengthen the ABC programming.

§ ABC will face strong competition from NBC and CBS. This competition can affect prime ratings and advertising revenues growth.

§ The cable business is very competitive, and ESPN has been an important driver for growth but the percentage of people that wants to watch sports hasn’t been growing as dynamically as in the past. Additionally, other competitors with strong channel and growing audiences (by demographics) such as Viacom’s MTV can be rough competitors and take some growth away from Disney.

§ DVD market can grow in more moderate rates in the short run, affecting projections for the studio entertainment division. Another risk is a retraction in the box office business due to competition, macro economic environment and unsuccessful cost cuttings policy.

§ The international expansion of Disney Parks can fail due to cultural issues (so far it has worked very well), and/or macro economic reasons.

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2.3 Opportunities - Growth

The company is investing in new content creation and cutting operating costs in all their main business (Media Networks, Studio Entertainment, Consumer Products, Parks). We are very confident that these investments, plus the quantity and quality of assets (e.g. film library, and characters, theme parks) of the company will generate revenue in the future. The business model of the company is heavily correlated with the U.S. economy, with consumer spending (Studio Entertainment, Parks, Consumer products), and advertising spending (Media Networks) being the most important revenue drivers. Currently, 65% of the revenues are strongly correlated with the economy, out of the comparable companies Disney has the higher exposure. The current economic downturn is affecting more the company than other competitors with different business models. However, we expect that the economy will recover by the end of 2002, and Disney will be again in good shape for the fiscal year of 2003 and later. Let’s analyze the sources of growth for each of the main areas: Media Networks :

• The company acquired Fox Family channel, which will become ABC Family, in 2001

($2.9 Billion in cash, plus $2.3 billion in debt). This acquisition is expected to increase the revenues in $600 million in 2003 (EBIAT close to $150 million).

• Advertising expenses are expected to recover in the middle of 2002. This was the main factor responsible by the ABC revenues decrease in 2001.

• Disney is investing heavily in ABC to improve programming and ratings. This could set the stage for recovery when the economy improves.

• The cable networks have been a big source of growth for Disney. Higher affiliate revenue, and strong digital subscriber growth and conversion of the Disney channel to basic premium have been key drivers for this segment.

• New networks such as Soap Net (17mm of subscribers) and Toon Disney (26mm of subscribers) continue to build distribution, and have a good growth perspective.

• Disney international channels are now in 14 countries, with a strong distribution growth (expected to breakeven in 2003).

Studio Entertainment

• Disney has strong resources to be the leader in the box office battle: Miramax and Disney

Buena Vista have a current market share of 20%. The Miramax methodology to select movies to invest is one of the best in Hollywood (using statistical models and historical data).

• Although Disney has a good market share, the company is having losses in their studio entertainment operations. However, the company is adjusting its costs to become profitable again.

• DVD will be another source of growth for Disney. DVD sales have doubled in the last 2 years (from 16mm to 32mm), and are expected to reach $60mm in 2002. The big Disney cartoon collection can be used to leverage its DVD sales, with similar products to the launch of Snow White and the seven Dwarfs on DVD (expected to sell 3mm units).

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Consumer Products

• The company is cutting costs and shutting down unprofitable Disney Stores The company is also slowing the pace of store refurbishing

• Disney is using its valuable characters to sign licensing agreements with important companies such as Coke in 2000, and Kellogg in 2001. These contracts will leverage the power of the company to sell their products to more customers. The royalties from these new contracts are expected to start to improve the revenues no sooner the beginning of 2003.

Parks

• In 2001, the company already expanded its theme parks in Anaheim, opening Downtown Disney and Disney’s California Adventure.

• The second gate at Disneyland in Paris will also be opening within the next year. • Disney is also planning to build a park in Hong Kong in 2002. Today Disney parks in

Japan receive 16 million people per year, and this park in Hong Kong can also be a big hit.

3. Financial Health

The 52-week range of Disney Stock price is in the range $15.80 - $34.00, and Disney Return on Stock for the last 52 weeks is negative in 29%, while the competitors average is 14% negative. The S&P return on the same period is –13%. Actually, Disney suffered more than its competitors, due its business model highly dependent on the economic situation (65% of revenues from consumer/advertising spending).

. The total revenues in 2000 were 25.4 Billion vs. 23.4 Billion of 1999, due mainly to the

growth of the Media Networks department (51% of total revenues). Net income, excluding non-cash amortization of intangible assets, increased by 30% to $2.1 Billion. The share of international revenues is also increasing. However, 82% of the total revenues are still coming from US, while 10% are coming from Europe, and 5% from Asia. The Disney strategy of opening parks in Europe and Asia will increase the international revenues and diversify the risk of local economic downturns.

Net Income Composition

0%

10%

20%

30%

40%

50%

60%

Media Network Studio

Entertainment

Parks and

Resorts

Consumer Group

1996

2000

Revenue composition has not changed considerably in the last five years. Media Network and Parks and Resorts are the main sources of revenue in 2000, while in 1996 Studio entertainment (-10%) and Consumer group (-3%) were more important than they were in 2000 rev.

Net Income composition has changed

considerably in the last five years. Media Network (50%) and Parks and Resorts (38%) are the main NI drivers in 2000, while in 1996 Studio entertainment was responsible by almost 20%. Looking at revenues composition, we can observe the rising costs in studio entertainment.

Revenue Composition

0%5%

10%15%20%25%30%35%40%45%

Media Network Studio

Entertainment

Parks and

Resorts

Consumer Group

1996

2000

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Analyzing the Disney growth in sales in relation to accounts receivable in the last five years, we have very similar numbers (110% vs. 101%), not indicating revenues manipulation through accounts receivables (Section 5). In relation to earnings smoothing, we observed that the volatility of net income in relation to the volatility of cash flows was very close to 1 (0.96, Section 5), not indicating earnings smoothing to reduce taxes. Finally, the EPS reported were also aligned with changes in Net Income, not signalizing EPS manipulations such as stocks buybacks and other tools to inflate EPS (Section 5 – Earnings Management ). Disney shows very good solvency ratios when compared to its main competitors. The unique ratio where Disney is riskier is the total debt in relation to total equity. This value is higher because of the capital structure of the company, which used debt to acquire new companies and raise capital instead of issuing more equity. We believe that in the future this ratio must decrease, given that the speed of new acquisitions must slow down.

Disney AOL Viacom Current Ratio 1.58 0.83 0.93 Quick Ratio 1.0 0.5 0.60 Interest Coverage 4.8 1.7 2.1 Total Debt/Equity 0.47 0.13 0.19

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4. Details on Valuation Analysis In order to get a comprehensive estimate of the share price we performed several analysis that include comparative valuations, DCF Model and EBO models 4.1 Comparative Valuations We used four comparables methods to evaluate price of Disney stock (P/E, PEG, M/B, P/Sales). Competitors included for this analysis are AOL, Viacom, Sony, Fox and Six flags. Detailed information about the calculation can be found in the Appendix 1. 4.1.1 Forward P/E Ratio Valuation Using Forward P/E ratios, we got a price of $28.71, which indicates that the current price would be undervalued ($20.47 as of Nov 30). We used the forward P/E ratios of the main five competitors, and multiplied the median of these numbers (45.98) by Disney forward EPS for 2002 (0.62). The problem of using P/E ratios in this case is that these companies should have similar rates of growth. However, Disney is a more mature company, which is projecting lower growth for the future than its competitors (for more details, please see Appendix 1.2). Consequently, assuming not very different risk structure, Disney should have a lower P/E ratio than the industry, and this price of $28.71 would be inflated. Other important assumption of this calculation is that the other competitors are correctly priced by the market, and their projected earnings for 2002 (including Disney Projection) are also correct. 4.1.2 PEG Ratio Valuation The price calculated through PEG ratio was $43.92, which indicates an extremely under valuation of current price. This measure eliminates one problem from the P/E ratio, which does not consider different growth rates for companies in the same industry. We used the five years growth projections from Bloomberg, assuming these numbers and projected earnings for 2002 are correct. The main problem for this calculation is that the 5 years growth for Disney and the other companies are being distorted due to the extremely poor results of 2001. In relation to Disney we decided to eliminate 2001 for the CAGR of 5 Years (using 2002 to 2006 to calculate the value). Otherwise the CAGR would be 83%, generating an unrealistic price. Therefore, due to the high uncertainties in relation to the growth for the next 5 years in this industry and extremely poor results in 2001, we think that this valuation of $43.92 does not reflect the correct value of Disney, and if we replace this growth, by more conservative values based on historical data (in the range of 9% to 11%), we get valuations in the range of $21.00 and $24.00 (very close to the current price). 4.1.3 M/B Ratio Valuation Using M/B ratios from the competitors, we got a price of $14.02, which indicates that the current price would be overvalued ($20.47 as of Nov 30). We compared Disney with companies that are in similar activities. However, these companies have different growth strategies (AOL and Viacom have used extensively acquisitions during the last two years). Consequently, their M/B are expected to be lower than Disney (which has invested more in organic growth), generating a

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lower price for Disney. Main assumptions of this methodology include similar growth, and risks for Disney and its competitors (which are assumed to be correctly priced). 4.1.4 M/Sales Ratio Valuation Using M/Sales ratio valuation we got a price of $27.17 for Disney, indicating that the current price would be undervalued. One of the main assumptions of this method is that the companies have similar margins and operations (e.g. accounts receivable and accounts payable with similar turnovers) to generate cash. Disney has struggling to cut costs and improve margins in the last years. Consequently, its M/Sales ratio is expected to be smaller than competitors with higher margins, and this price of $27.17 should be small to reflect different margins and operations. 4.1 DCF Model and Residual Income valuations Disney cost of capital as calculated using Fama-French’s 3 Factor Model and using CAPM is 13.83% and 11.57% respectively. In our models we will use 3 factor model cost of capital.

The DCF analysis values Disney at $17.87. In order to get this estimates projected free cash flows for the next 5 years were generated the main assumptions are (for FCF projections and all assumptions see Appendix 2): Recession continues to affect the firm until FY02; we do not assume a full recovery until 2003. COGS & SG&A rise as a percentage of sales due to the costs of economic distress (i.e., cancellations, severances, etc.). A 5% annual increase in PPE is assumed, mostly to replace depreciated fixed assets. Straight- line amortization of TV production was assumed. The firm will adopt rule SFAS 142 thereby eliminating most of its intangible asset amortization. The terminal value of the firm is calculated with a zero percent growth assumption. The Residual Income valuation prices Disney’s stock at $5.86. This value is very low and reflects the large assets available for the firm, and its low utilization of these assets. For example in 2000, Disney had a return on assets of only 2.07%. To see DCF and Residual valuations look at Appendix 3.

B(i) Fama-Frech FactorRf 3.5%(Rm-Rf) 0.0868 1.06 9.2%SMB 0.0302 -0.1 -0.3%HML 0.0471 0.304 1.4%

13.8%R(Fama-French)

Fama - French Based Cost of CapitalRDisney = -0.157 + 1.06(Rm-Rf) – 0.1(SMB) + 0.304(HML)

RF = 3.5%Beta = 0.93[ RM - RF ] 8.68%

11.6%

CAPM Based Cost of CapitalR = RF + Beta * ( RM - Rf )[ Treasury - 3 Months ][ Yahoo Finance ]

R(CAPM)

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4.2 Sensitivity Analysis Sensitivity analysis was performed for both Residual Income and DCF valuations.

Sensitivity Analysis Sensitivity Analysis Sensitivity Analysis R RIV DCF E 2006+ RIV DCF NI Increase RIV DCF 5.00% $15.85 $79.05 -5.00% $ 3.57 $ 13.75 -50.00% $ 3.70 $ 13.53 7.50% $11.05 $39.63 -2.50% $ 4.67 $ 14.71 -25.00% $ 4.78 $ 15.70

10.00% $ 8.30 $26.59 0.00% $ 5.37 $ 16.00 -10.00% $ 5.42 $ 17.00 11.57% $ 7.12 $22.11 2.50% $ 5.86 $ 17.87 0.00% $ 5.86 $ 17.87 12.50% $ 6.55 $20.13 5.00% $ 6.21 $ 20.80 10.00% $ 6.29 $ 18.74 13.83% $ 5.86 $17.87 7.50% $ 6.49 $ 26.05 25.00% $ 6.93 $ 20.05 15.00% $ 5.34 $16.30 10.00% $ 6.70 $ 38.13 50.00% $ 8.01 $ 22.22 17.50% $ 4.47 $13.77

We believe the key assumption is earnings growth in perpetuity. Our 2.5% growth rate is based on Disney’s capability of content creation as well as the strong distribution channels the Media Networks and Studio Entertainment provide for Disney. These capabilities would assure to Disney a growth similar to the expected growth of the economy plus inflation (2.5%).

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5. Earnings Management We performed three analyses with Disney and its main competitor to check the quality of

Disney earnings. Disney did not show evidences of earnings management in any one of the studies, and it was also well positioned in relation to the other competitor results.

• Sales vs. Accounts Receivable:

Through this analysis, we can analyze if accounts receivable is growing faster than sales, and in some cases this can be a strong sign of earnings management, where the company is using accounts receivables to inflate its revenues.

Analyzing the graphs above, we can see on the graphic at the left that Disney only grew more its accounts receivable than its sales in the year of 1996. On the graphic about cumulative growth (right), we can observe how the accounts receivable and sales are growing close to each other year by year cumulatively. In the Appendix 4.1, we can compare Disney with their other competitors earnings practices. Fox, AOL, and Sony also show a reasonable growth of sales in relation to accounts receivable. On the other hand, Viacom and Six flags demonstrated a bigger growth of accounts receivable than Sales in the last five years, which could be an initial evidence of earnings management through accruals.

• Variability of Earnings in relation to Variability of Cash flows:

The companies have some strong incentives to smooth its earnings year by year,

such as to pay less tax in a progressive structure. This method divides the variability of earnings by the variability of cash flows. If the result is smaller than one, we have some evidences of earnings smoothing, because the cash flows are changing faster than the earnings. In the Appendix 4.2, we have a detailed description of how the numbers in the table below were calculated:

Disney AOL Viacom Fox* Sony Six Flags Vol (OIBD) 23% 123% 44% 30% 15% 93%Vol (OA-NCF) 24% 120% 120% 181% 29% 88%Vol (OIBD) / Vol(OA-NCF) 96% 103% 37% 16% 53% 106%

Disney has a ratio very close to 1 (0.96), not indicating evidences of earnings

smoothing. Together with Disney, we have AOL (1.03) and Six Flags (1.06) without problems in relation to earnings smoothing. However, Viacom, Fox, and Sony are present ing ratios very below than one and this could represent some earnings smoothing

Disney - Sales vs. AR Growth

-20%

0%

20%

40%

60%

80%

100%

1995 1996 1997 1998 1999 2000

% growth in Sales

% growth in AR

Disney Sales vs. AR Cum. growth

0%50%

100%150%200%250%300%

1995 1996 1997 1998 1999 2000

Sales

AR

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management (we should execute further research about these companies to figure out why exactly this is happening).

• Net Income vs. EPS growths:

Managers have incentives to meet EPS targets, and many times EPS growth is not reflecting the growth in the company net income. The company can be buying back its stocks, reducing the total outstanding shares, and inflating its EPS ratio, among other procedures to inflate EPS.

Disney AOL Viacom 1999 2000 % 1999 2000 % 1999 2000 % Net Income 1300 920 -29.2% 762 1232 61.7% 371.7 -363.8 -197.9%Basic EPS 0.63 0.43 -31.7% 0.73 0.54 -26.0% 0.52 -0.3 -157.7% Fox Sony Six Flags 1999 2000 % 1999 2000 % 1999 2000 % Net Income 205 145 -29.3% 1,149.00 134.00 -88% -30.53 -51.96 70%Basic EPS 0.33 0.2 -39.4% 2.72 1.06 -61% -0.55 -0.96 75%

Looking at the table above, we can observe that Disney Net Income growth is

very close to its basic EPS growth. Therefore, we do not have signs of EPS manipulation. Looking at the competitors we also do not see a clear situation where the growth in the EPS was dramatically bigger than the growth in the Net Income. Actually only Viacom and Sony showed EPS growth bigger than Net Income growth (-157% vs. -197%, and -61% vs. -88% respectively).

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Appendix 1 - Comparables Tables

Appendix 1.1 - Competitors ratios

Current Price* Forecasted EPS 2002**

Forward P/E Growth next 5 Years**

Forward PEG Shares Outstanding*

Mkt Cap (Billion)

Equity - BV (Billion)*

Sales (Billion)* M/B P/Sales

AOL 34.90$ 1.36 25.7 23.86% 1.08 4.43B 154.61 154.16$ 37.21$ 1.00 4.15 Viacom 43.73$ 0.18 242.9 15.40% 15.78 1.77B 77.40 62.68$ 23.31$ 1.23 3.32 Sony 47.70$ 1.04 46.0 8.10% 5.68 0.91B 43.41 17.46$ 57.00$ 2.49 0.76 Fox 25.52$ 0.35 72.9 17.40% 4.19 846.3M 21.60 11.38$ 9.97$ 1.90 2.17 Six Flags 14.32$ -0.43 (33.3) 12.83% -2.60 92.4M 1.32 1.55$ 1.08$ 0.86 1.22 Averages 70.8 4.8 1.5 2.3 Median*** 46.0 4.2 1.2 2.2

* Data from Yahoo Finance** Data from Bloomberg

** Sony fiscal year ends 03/2002, number is the weighted average between 03/02 (25%, 0.92) and 03/03 (75%, 1.11)** Fox fiscal year ends 06/2002, number is the average between 06/2002(0.27) and 06/2003 (0.43)

*** Mean ratios will be used to eliminate outliers

Appendix 1.2 - Disney Price based on Comparables

Current Price 20.47$

Forward EPS 2002

P/E ratio Competitors

P/E PricePEG ratio

CompetitorsGrowth Next 5

years*PEG Price

Book Value per Share

M/B Compet. M/B PriceSales per

ShareM/Sales Compet.

P/Sales Price

0.62$ 46.0 28.71$ 4.2 16.78% 43.92$ 11.35$ 1.2 14.02$ 12.54$ 2.2 27.17$ % difference of Current Price = 40% % difference of Current Price = 115% % difference of Current Price = -32% % difference of Current Price = 33%

* We decided to calculate the CAGR for the next five years, excluding the year 2001, so we calculated based on the EPS growth from 2002 to 2006adjusting for 4 years to get the annual growth. We decided to exclude 2001, because Disney had a very uncommon year and it looked like a "BIG BATH", where the company had a tough year, plus big one time expenses such as the Internet operations shutdown

P/SalesP/E PEG M/Book

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Appendix 2 - FCF 1997 1998 1999 2000 2001 2002 (1) 2003 (2) 2004 2005 2006

Sales 22,473,000 22,976,000 23,435,000 25,402,000 25,269,000 24,005,550 24,245,606 24,730,518 25,348,781 26,109,244COGS 13,203,000 15,143,000 16,392,000 17,890,000 18,229,900 16,779,879 16,850,696 17,187,710 17,490,659 17,754,286 SG&A 367,000 164,000 140,000 105,000 125,000 118,750 145,474 173,114 202,790 201,161 Depreciation 705,000 809,000 851,000 962,000 960,100 960,100 960,100 940,898 926,076 926,076 Amort Prodn Costs (3) 4,253,000 2,514,000 2,472,000 2,469,000 2,480,000 2,480,000 2,480,000 2,480,000 2,480,000 2,480,000 Amort Intangibles (4) 0 431,000 456,000 1,233,000 767,000 20,000 20,000 20,000 20,000 20,000 Other 135,000 -136,000 -198,000 341,000 (1,111,000) (1,055,450) (727,368) (494,610) (228,139) (208,874) EBIT 4,080,000 3,779,000 2,926,000 3,084,000 1,596,000 2,591,371 3,061,968 3,434,186 4,001,116 4,518,847Interest 693,000 622,000 612,000 558,000 417,000 417,000 434,000 448,000 462,000 474,463 Taxes 1,421,000 1,307,000 1,014,000 1,606,000 1,059,000 869,748 1,051,187 1,194,474 1,415,647 1,617,754 Net Income 1,966,000 1,850,000 1,300,000 920,000 120,000 1,304,622 1,576,781 1,791,712 2,123,470 2,426,631

EPS 0.94 0.89 0.62 0.44 0.06 0.62 0.75 0.86 1.02 1.16

PPE 16,023,000 18,234,000 17,566,000 19,202,000 19,202,000 19,202,000 19,202,000 19,202,000 19,202,000 19,202,000 Capex (5) - - - - - - Debt (6) 10,171,000 9,562,000 9,278,000 6,959,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000

W/C Accruals 1,377,000 1,850,000 2,020,000 1,605,000

Sales Growth (7) 19.9% 2.2% 2.0% 8.4% -0.5% -5.0% 1.0% 2.0% 2.5% 3.0%COGS/Sales (8) 58.8% 65.9% 69.9% 70.4% 72.1% 69.9% 69.5% 69.5% 69.0% 68.0%SG&A/Sales 1.6% 0.7% 0.6% 0.4% 0.5% 0.5% 0.6% 0.7% 0.8% 0.8%Deprec/PPE 4.4% 4.8% 5.0% 5.0% 5.0% 5.0% 4.9% 4.8% 4.8%Other/Sales (9) 0.6% -0.6% -0.8% 1.3% -4.4% -4.4% -3.0% -2.0% -0.9% -0.8%Interest/Debt (10) 6.8% 6.5% 6.6% 8.0% 6.0% 6.0% 6.2% 6.4% 6.6% 6.8%Tax rate (11) 42.0% 41.4% 43.8% 63.6% 89.8% 40.0% 40.0% 40.0% 40.0% 40.0%

Shares outst 2,089,000 1) We have assumed a bad FY02 as the recession affects the firm.2) We do not assume a full recovery until 2003.3) We have assumed a straight-line amortization of TV production 4) The firm will adopt rule SFAS 142 thereby eliminating most of its intanngible asset amortization.5) We have assumed a 5% annual increase in PPE, mostly to replace depreciated fixed assets.6) We do not foresee a pick-up in debt due to the economic recession.7) We foresee a dramatic fall in sales in FY02, a recuperation in FY03 and stabilization thereafter towards a long-term growth rate of 3%.8) COGS & SG&A rise as a percentage of sales due to the costs of economic distress (i.e., cancellations, severances, etc.)9) Includes expected restructuring charges.10) The firm only has a 26.5% debt/cap ratio so we do not expect a pick up in interest expenses although the firm may take advantage of low ratesand refinance some old debt.11) We assume a constant tax rate of 40%.12) The terminal value of the firm is calculated with a zero percent growth assumption.13) The cost of capital is calculated under the three-factor model.

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Cost of Capital for Disney (2) 13.83% 13%Earnings Growth 2006+ (3) 2.50% 2,089

Residual Income Valuation 2,001 2,002 2,003 2,004 2,005 2,006 2,007 Book Value of Equity (4) 25,020$ 25,140$ 26,445$ 28,021$ 29,813$ 31,937$ R RIV DCFr (Cost of Capital) 13.83% 13.83% 13.83% 13.83% 13.83% 13.83% 5.00% 15.85$ 79.05$ Expected Earnings 3,460$ 3,477$ 3,657$ 3,876$ 4,123$ 4,417$ 7.50% 11.05$ 39.63$ Earnings 120$ 1,305$ 1,577$ 1,792$ 2,123$ 2,427$ 10.00% 8.30$ 26.59$ Abnormal Earnings (3,340)$ (2,172)$ (2,081)$ (2,084)$ (2,000)$ (1,990)$ (1,990) 11.57% 7.12$ 22.11$ Perpetuity 0.025 Growth (12,246) 12.50% 6.55$ 20.13$ Present Value of column 25,020$ (1,908.45)$ (1,605.78)$ (1,412.81)$ (1,191.15)$ (1,041.47)$ (5,629) 13.83% 5.86$ 17.87$ Present Value of Equity 12,231$ 15.00% 5.34$ 16.30$

17.50% 4.47$ 13.77$ Price per Share 5.86$

E 2006+ RIV DCFDCF Equity Valuation 2,002 2,003 2,004 2,005 2,006 2,007 -5.00% 3.57$ 13.75$ Net income 1,305 1,577 1,792 2,123 2,427 -2.50% 4.67$ 14.71$ +Dep 3,580 3,599 3,659 3,720 3,785 0.00% 5.37$ 16.00$ -W/C Accruals 200 200 200 200 200 2.50% 5.86$ 17.87$ Capex 1,137 1,194 1,230 1,279 1,330 5.00% 6.21$ 20.80$ FCF 3,548 3,782 4,021 4,365 4,681 7.50% 6.49$ 26.05$

Perpetuity 0.025 Growth 41,313 10.00% 6.70$ 38.13$ Present Value of column 3,548$ 3,322.70$ 3,102.99$ 2,959.37$ 2,788.10$ 21,617$ Present Value of Equity 37,338$

NI Increase RIV DCFPrice per Share 17.87$ -50.00% 3.70$ 13.53$

-25.00% 4.78$ 15.70$ -10.00% 5.42$ 17.00$

% Increase for Sensitivity 0% 0.00% 5.86$ 17.87$ Estimated Net Income 1,305 1,577 1,792 2,123 2,427 10.00% 6.29$ 18.74$ Modified Net Income 1,305 1,577 1,792 2,123 2,427 25.00% 6.93$ 20.05$

50.00% 8.01$ 22.22$ (1) Compounded Earning Growth rate for standard model, based on the cash flows estimated(2) Estimated base using Fama-French factor of 13.83%, also tested effect of regular CAPM with r of 11.57% (3) Estimated earnings growth after 2006, based on growth in the GDP of 2.5% (4) Assumed a no dividend, and no significant effects from other capital changes

Sensitivity Analysis

Sensitivity Analysis

Appendix 3 -Residual Income and DCF Equity Valuations for Disney

Earnings Growth Rate (1)# of share outstanding 9/30/01

Sensitivity Analysis

15

Disney Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 5 YearSales 10,055.10 12,112.10 18,739.00 22,473.00 22,976.00 23,402.00 25,402.00Accounts Receivable 1,670.50 1,792.80 3,343.00 3,726.00 3,999.00 3,633.00 3,599.00% growth in Sales 20% 55% 20% 2% 2% 9% 110%% growth in AR 7% 86% 11% 7% -9% -1% 101%AOL Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 5 YearSales 104.41 394.29 1093.85 1685.23 2600 4777 6886Accounts Receivable 7.27 43.28 72.61 91.4 196 402 532% growth in Sales 278% 177% 54% 54% 84% 44% 1646%% growth in AR 495% 68% 26% 114% 105% 32% 1129%Viacom Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 5 YearSales 7,363.20 11,688.70 12,084.20 13,206.10 12,096.10 12,858.80 20,043.70Accounts Receivable 1,638.80 1,872.40 2,153.10 2,397.70 1,759.10 1,697.40 3,964.10% growth in Sales 59% 3% 9% -8% 6% 56% 71%% growth in AR 14% 15% 11% -27% -4% 134% 112%Fox* Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00Sales . . . 5,847.00 7,023.00 8,057.00 8,589.00Accounts Receivable . . . 1,599.00 1,949.00 1,756.00 2,191.00% growth in Sales 20% 15% 7% 47%% growth in AR 22% -10% 25% 37%Sony Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 5 YearSales 44,757.73 43,326.09 45,670.44 51,177.96 56,621.83 63,082.00 58,518.00Accounts Receivable 7,044.11 8,064.18 7,843.40 8,453.70 8,446.53 9,957.00 10,362.00% growth in Sales -3% 5% 12% 11% 11% -7% 35%% growth in AR 14% -3% 8% 0% 18% 4% 28%Six Flags Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 5 YearSales 25.37 41.50 93.45 193.90 813.63 926.98 1,006.98Accounts Receivable 0.87 0.97 1.18 7.53 31.48 29.21 40.77% growth in Sales 64% 125% 107% 320% 14% 9% 2326%% growth in AR 11% 22% 538% 318% -7% 40% 4103%

Disney Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00Operating Income Before Depreciation 3,411.80 4,115.10 6,968.00 8,903.00 7,533.00 6,814.00 7,407.00Operating Actiities - Net Cash Flow 2,807.30 3,510.10 4,625.00 7,064.00 5,115.00 5,588.00 6,434.00AOL Jan-00 Jan-00 Jan-00 Jan-00 Jan-00 Jan-00 Jan-00Operating Income Before Depreciation 9.32 40.17 108.34 1.46 292 802 1717Operating Actiities - Net Cash Flow 43.06 15.89 -66.73 123.05 411 1099 1808Viacom Jan-00 Jan-00 Jan-00 Jan-00 Jan-00 Jan-00 Jan-00Operating Income Before Depreciation 824.2 1857.4 1764.5 1518.3 1630.1 1814.4 4242.9Operating Actiities - Net Cash Flow 339.2 55.6 70.5 340 864.1 294.1 2323.3Fox* Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00Operating Income Before Depreciation . . . 505.00 923.00 1,031.00 1,096.00Operating Actiities - Net Cash Flow . . . 117 306 753 -253Sony Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00Operating Income Before Depreciation 3,532.38 4,273.08 5,008.12 6,060.89 5,209.61 5,162.00 6,546.00 Operating Actiities - Net Cash Flow 2,044.26 2,209.22 5,831.73 4,639.02 5,527.23 5,467.00 4,358.00Six Flags Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00Operating Income Before Depreciation 5.01 7.81 22.99 52.98 279.96 306.31 356.71Operating Actiities - Net Cash Flow 1.06 10.65 11.33 47.15 119.01 197.35 176.16

Only 3 years Disney AOL Viacom Fox* Sony Six Flags

Std of Operating Income Before Depreciation 1,575.95 609.47 948.29 265.60 807.86 159.46 Average Operating Income Before Depreciation 6,956.68 493.50 2,137.93 888.75 5,376.62 171.13 Std of Operating Actiities - Net Cash Flow 1,274.86 676.98 791.34 418.47 1,332.17 82.50 Average Operating Actiities - Net Cash Flow 5,389.35 565.04 657.93 230.75 4,672.03 93.61

Vol (OIBD) 23% 123% 44% 30% 15% 93%Vol (OA-NCF) 24% 120% 120% 181% 29% 88%Vol (OIBD) / Vol(OA-NCF) 96% 103% 37% 16% 53% 106%

*Fox just have four years of available data due to its historical track be limited from the year of 1997

Appendix 4.1 - Sales versus Accounts Receivables

Appendix 4.2 - Earnings Smoothing Analysis