Analysis of the Walt Disney Company

Report by Valanium Analysts: Juan Calderon, Sergio Delgado, Andre Oliveira, and Juan Paiz Investment Recommendation: MARKET PERFORM
DIS NYSE (12/3/01) 52 week range Revenue (2001 Unaudited) Market Capitalization Shares Outstanding Dividend Yield (2000) Avg Daily Trading Volume Book Value per Share (09/01 un audited) $20.47 $15.50 - $34.80 $25,256 Million $42,762 Million 2,089 Million 1.01% 10,605,954 Actual Current Price $11.98 Current Price $ 20.47 EPS Forecast FYE 09/30 EPS Ratios Forward P/E Forward PEG M/B 2002E $0.62 Firm 32.78 1.95 1.84

December 3,2001
2003E $0.75 2004E $0.86 2005E $1.02

Average of Competitors 45.98 4.19 1.23

Valuation Predictions

Return of Equity 3.8% Return on Assets 2.0% Est. 5 Years EPS 16.78% Growth Rate (2002-2006) Industry Entertainment Media Conglomerate

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 Return on Disney Return on S&P 500 Return on Competitors

6 mo -54% -17% -52%

12 mo 24 mo -29% -14% -13% - 09% -14% -24%

DIS

S&P 500

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.

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 Disneys 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 companys 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. Disneys 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.

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 Blockbusters 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 hasnt been growing as dynamically as in the past. Additionally, other competitors with strong channel and growing audiences (by demographics) such as Viacoms 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. Lets 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).

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 Disneys 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). Revenue Composition 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.
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Media Network Studio Entertainment Parks and Resorts

1996 2000

Consumer Group

Net Income Composition

60% 50% 40% 30% 20% 10% 0% Media Network Studio Entertainment Parks and Resorts Consumer Group

1996 2000

. 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 noncash 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.

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 Current Ratio 1.58 0.83 0.93 Quick Ratio 1.0 0.5 0.60 ratios when compared to its main competitors. Interest Coverage 4.8 1.7 2.1 The unique ratio where Disney is riskier is the Total Debt/Equity 0.47 0.13 0.19 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

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 ove rvalued ($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-Frenchs 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.
Fama - French Based Cost of Capital RDisney = -0.157 + 1.06(Rm-Rf) 0.1(SMB) + 0.304(HML) B(i)
3.5% 0.93 8.68% 11.6%

RF = Beta = [ RM - RF ]

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

Fama-Frech Factor 1.06 -0.1 0.304 R(Fama-French) 3.5% 9.2% -0.3% 1.4% 13.8%

Rf (Rm-Rf) SMB HML

0.0868 0.0302 0.0471

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 Disneys 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.

4.2 Sensitivity Analysis Sensitivity analysis was performed for both Residual Income and DCF valuations.
Sensitivity Analysis R RIV DCF 5.00% $15.85 $79.05 7.50% $11.05 $39.63 10.00% $ 8.30 $26.59 11.57% $ 7.12 $22.11 12.50% $ 6.55 $20.13 13.83% $ 5.86 $17.87 15.00% $ 5.34 $16.30 17.50% $ 4.47 $13.77 Sensitivity Analysis E 2006+ RIV DCF -5.00% $ 3.57 $ 13.75 -2.50% $ 4.67 $ 14.71 0.00% $ 5.37 $ 16.00 2.50% $ 5.86 $ 17.87 5.00% $ 6.21 $ 20.80 7.50% $ 6.49 $ 26.05 10.00% $ 6.70 $ 38.13 Sensitivity Analysis NI Increase RIV DCF -50.00% $ 3.70 $ 13.53 -25.00% $ 4.78 $ 15.70 -10.00% $ 5.42 $ 17.00 0.00% $ 5.86 $ 17.87 10.00% $ 6.29 $ 18.74 25.00% $ 6.93 $ 20.05 50.00% $ 8.01 $ 22.22

We believe the key assumption is earnings growth in perpetuity. Our 2.5% growth rate is based on Disneys 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%).

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.
Disney - Sales vs. AR Growth 100% 80% 60% 40% 20% 0% -20% 1995 1996 1997 1998 1999 2000

% growth in Sales % growth in AR

Disney Sales vs. AR Cum. growth 300% 250% 200% 150% 100% 50% 0% 1995 1996 1997 1998 1999

Sales AR

2000

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 demo nstrated 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 23% 24% 96% AOL Viacom 123% 44% 120% 120% 103% 37% Fox* 30% 181% 16% Sony Six Flags 15% 93% 29% 88% 53% 106%

Vol (OIBD) Vol (OA-NCF) Vol (OIBD) / Vol(OA-NCF)

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
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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 2000 920 0.43 Fox 2000 145 0.2 AOL 2000 762 1232 0.73 0.54 Sony 2000 134.00 1.06 Viacom 2000 -363.8 -0.3 Six Flags 2000 -51.96 -0.96

Net Income Basic EPS

1999 1300 0.63

% -29.2% -31.7%

1999

% 61.7% -26.0%

1999 371.7 0.52

% -197.9% -157.7%

Net Income Basic EPS

1999 205 0.33

% -29.3% -39.4%

1999 1,149.00 2.72

% -88% -61%

1999 -30.53 -0.55

% 70% 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* AOL Viacom Sony Fox Six Flags Averages Median*** $ $ $ $ $ 34.90 43.73 47.70 25.52 14.32 Forecasted EPS 2002** 1.36 0.18 1.04 0.35 -0.43 Forward P/E 25.7 242.9 46.0 72.9 (33.3) 70.8 46.0 Growth next 5 Shares Forward PEG Years** Outstanding* 23.86% 1.08 4.43B 15.40% 15.78 1.77B 8.10% 5.68 0.91B 17.40% 4.19 846.3M -2.60 12.83% 92.4M 4.8 4.2 Mkt Cap (Billion) 154.61 77.40 43.41 21.60 1.32 Equity - BV (Billion)* $ 154.16 $ 62.68 $ 17.46 $ 11.38 $ 1.55 Sales (Billion)* $ $ $ $ $ 37.21 23.31 57.00 9.97 1.08 M/B 1.00 1.23 2.49 1.90 0.86 1.5 1.2 P/Sales 4.15 3.32 0.76 2.17 1.22 2.3 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 P/E Forward EPS 2002 P/E ratio Competitors P/E Price $ 20.47 PEG PEG ratio Growth Next 5 Competitors years* PEG Price Book Value per Share M/Book M/B Compet. $ M/B Price Sales per Share P/Sales M/Sales Compet. P/Sales Price $ 27.17 33%

$ 0.62 46.0 $ % difference of Current Price =

28.71 4.2 16.78% $ 40% % difference of Current Price =

43.92 $ 11.35 1.2 115% % difference of Current Price =

14.02 $ 12.54 2.2 -32% % difference of Current Price =

* 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 2006 adjusting 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

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Appendix 2 - FCF
Sales COGS SG&A Depreciation Amort Prodn Costs (3) Amort Intangibles (4) Other EBIT Interest Taxes Net Income EPS PPE Capex (5) Debt (6) W/C Accruals 1997 22,473,000 13,203,000 367,000 705,000 4,253,000 0 135,000 4,080,000 693,000 1,421,000 1,966,000 0.94 16,023,000 10,171,000 1,377,000 1998 22,976,000 15,143,000 164,000 809,000 2,514,000 431,000 -136,000 3,779,000 622,000 1,307,000 1,850,000 0.89 18,234,000 9,562,000 1,850,000 1999 23,435,000 16,392,000 140,000 851,000 2,472,000 456,000 -198,000 2,926,000 612,000 1,014,000 1,300,000 0.62 17,566,000 9,278,000 2,020,000 2000 25,402,000 17,890,000 105,000 962,000 2,469,000 1,233,000 341,000 3,084,000 558,000 1,606,000 920,000 0.44 19,202,000 6,959,000 1,605,000 2001 25,269,000 18,229,900 125,000 960,100 2,480,000 767,000 (1,111,000) 1,596,000 417,000 1,059,000 120,000 0.06 19,202,000 7,000,000 2002 (1) 24,005,550 16,779,879 118,750 960,100 2,480,000 20,000 (1,055,450) 2,591,371 417,000 869,748 1,304,622 0.62 19,202,000 7,000,000 2003 (2) 24,245,606 16,850,696 145,474 960,100 2,480,000 20,000 (727,368) 3,061,968 434,000 1,051,187 1,576,781 0.75 19,202,000 7,000,000 2004 2005 24,730,518 25,348,781 17,187,710 17,490,659 173,114 202,790 940,898 926,076 2,480,000 2,480,000 20,000 20,000 (494,610) (228,139) 3,434,186 4,001,116 448,000 462,000 1,194,474 1,415,647 1,791,712 2,123,470 0.86 19,202,000 7,000,000 1.02 19,202,000 7,000,000 2006 26,109,244 17,754,286 201,161 926,076 2,480,000 20,000 (208,874) 4,518,847 474,463 1,617,754 2,426,631 1.16 19,202,000 7,000,000

Sales Growth (7) COGS/Sales (8) SG&A/Sales Deprec/PPE Other/Sales (9) Interest/Debt (10) Tax rate (11)

19.9% 58.8% 1.6% 0.6% 6.8% 42.0%

2.2% 65.9% 0.7% 4.4% -0.6% 6.5% 41.4%

2.0% 69.9% 0.6% 4.8% -0.8% 6.6% 43.8%

8.4% 70.4% 0.4% 5.0% 1.3% 8.0% 63.6%

-0.5% 72.1% 0.5% 5.0% -4.4% 6.0% 89.8%

-5.0% 69.9% 0.5% 5.0% -4.4% 6.0% 40.0%

1.0% 69.5% 0.6% 5.0% -3.0% 6.2% 40.0%

2.0% 69.5% 0.7% 4.9% -2.0% 6.4% 40.0%

2.5% 69.0% 0.8% 4.8% -0.9% 6.6% 40.0%

3.0% 68.0% 0.8% 4.8% -0.8% 6.8% 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 rates and 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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Appendix 3 -Residual Income and DCF Equity Valuations for Disney

Cost of Capital for Disney (2) Earnings Growth 2006+ (3) Residual Income Valuation Book Value of Equity (4) r (Cost of Capital) Expected Earnings Earnings Abnormal Earnings Perpetuity 0.025 Growth Present Value of column Present Value of Equity Price per Share 13.83% 2.50% 2,001 25,020 13.83% 3,460 120 (3,340) 2,002 25,140 13.83% 3,477 1,305 (2,172) 2,003 26,445 13.83% 3,657 1,577 (2,081) Earnings Growth Rate (1) # of share outstanding 9/30/01 2,004 28,021 13.83% 3,876 1,792 (2,084) 2,005 29,813 13.83% 4,123 2,123 (2,000) 2,006 31,937 13.83% 4,417 2,427 (1,990) 13% 2,089 2,007 Sensitivity Analysis R RIV DCF 5.00% $ 15.85 $ 79.05 7.50% $ 11.05 $ 39.63 10.00% $ 8.30 $ 26.59 11.57% $ 7.12 $ 22.11 12.50% $ 6.55 $ 20.13 13.83% $ 5.86 $ 17.87 15.00% $ 5.34 $ 16.30 17.50% $ 4.47 $ 13.77 Sensitivity Analysis E 2006+ RIV DCF -5.00% $ 3.57 $ 13.75 -2.50% $ 4.67 $ 14.71 0.00% $ 5.37 $ 16.00 2.50% $ 5.86 $ 17.87 5.00% $ 6.21 $ 20.80 7.50% $ 6.49 $ 26.05 10.00% $ 6.70 $ 38.13 Sensitivity Analysis NI Increase RIV DCF -50.00% $ 3.70 $ 13.53 -25.00% $ 4.78 $ 15.70 -10.00% $ 5.42 $ 17.00 0.00% $ 5.86 $ 17.87 10.00% $ 6.29 $ 18.74 25.00% $ 6.93 $ 20.05 50.00% $ 8.01 $ 22.22

$ $ $ $ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

25,020 $ (1,908.45) $ (1,605.78) $ (1,412.81) $ (1,191.15) $ (1,041.47) 12,231 5.86

(1,990) (12,246) (5,629)

DCF Equity Valuation Net income +Dep -W/C Accruals Capex FCF Perpetuity 0.025 Growth Present Value of column Present Value of Equity Price per Share

2,002 1,305 3,580 200 1,137 3,548 $ $ $ 3,548 $ 37,338 17.87

2,003 1,577 3,599 200 1,194 3,782 3,322.70 $

2,004 1,792 3,659 200 1,230 4,021 3,102.99 $

2,005 2,123 3,720 200 1,279 4,365

2,006 2,427 3,785 200 1,330 4,681

2,007

2,959.37 $ 2,788.10 $

41,313 21,617

% Increase for Sensitivity Estimated Net Income Modified Net Income

0% 1,305 1,305

1,577 1,577

1,792 1,792

2,123 2,123

2,427 2,427

(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

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Appendix 4.1 - Sales versus Accounts Receivables

Disney Sales Accounts Receivable % growth in Sales % growth in AR AOL Sales Accounts Receivable % growth in Sales % growth in AR Viacom Sales Accounts Receivable % growth in Sales % growth in AR Fox* Sales Accounts Receivable % growth in Sales % growth in AR Sony Sales Accounts Receivable % growth in Sales % growth in AR Six Flags Sales Accounts Receivable % growth in Sales % growth in AR Sep-94 Sep-95 10,055.10 12,112.10 1,670.50 1,792.80 20% 7% Jun-94 Jun-95 104.41 394.29 7.27 43.28 278% 495% Dec-94 Dec-95 7,363.20 11,688.70 1,638.80 1,872.40 59% 14% Jun-94 Jun-95 . . . . Sep-96 18,739.00 3,343.00 55% 86% Jun-96 1093.85 72.61 177% 68% Dec-96 12,084.20 2,153.10 3% 15% Jun-96 . . Sep-97 22,473.00 3,726.00 20% 11% Jun-97 1685.23 91.4 54% 26% Dec-97 13,206.10 2,397.70 9% 11% Jun-97 5,847.00 1,599.00 Sep-98 22,976.00 3,999.00 2% 7% Jun-98 2600 196 54% 114% Dec-98 12,096.10 1,759.10 -8% -27% Jun-98 7,023.00 1,949.00 20% 22% Mar-98 56,621.83 8,446.53 11% 0% Dec-98 813.63 31.48 320% 318% Sep-99 23,402.00 3,633.00 2% -9% Jun-99 4777 402 84% 105% Dec-99 12,858.80 1,697.40 6% -4% Jun-99 8,057.00 1,756.00 15% -10% Mar-99 63,082.00 9,957.00 11% 18% Dec-99 926.98 29.21 14% -7% Sep-00 25,402.00 3,599.00 9% -1% Jun-00 6886 532 44% 32% Dec-00 20,043.70 3,964.10 56% 134% Jun-00 8,589.00 2,191.00 7% 25% Mar-00 58,518.00 10,362.00 -7% 4% Dec-00 1,006.98 40.77 9% 40% 5 Year

110% 101% 5 Year

1646% 1129% 5 Year

71% 112%

Mar-94 Mar-95 Mar-96 44,757.73 43,326.09 45,670.44 7,044.11 8,064.18 7,843.40 -3% 5% 14% -3% Dec-94 Dec-95 Dec-96 25.37 41.50 93.45 0.87 0.97 1.18 64% 125% 11% 22%

Mar-97 51,177.96 8,453.70 12% 8% Dec-97 193.90 7.53 107% 538%

47% 37% 5 Year

35% 28% 5 Year

2326% 4103%

Appendix 4.2 - Earnings Smoothing Analysis

Disney Operating Income Operating Actiities AOL Operating Income Operating Actiities Viacom Operating Income Operating Actiities Fox* Operating Income Operating Actiities Sony Operating Income Operating Actiities Six Flags Operating Income Operating Actiities Before Depreciation - Net Cash Flow Before Depreciation - Net Cash Flow Before Depreciation - Net Cash Flow Before Depreciation - Net Cash Flow Before Depreciation - Net Cash Flow Before Depreciation - Net Cash Flow . . Sep-94 3,411.80 2,807.30 Jan-00 9.32 43.06 Jan-00 824.2 339.2 Jun-94 . . Mar-94 Mar-95 3,532.38 4,273.08 2,044.26 2,209.22 Dec-94 Dec-95 5.01 7.81 1.06 10.65 Sep-95 4,115.10 3,510.10 Jan-00 40.17 15.89 Jan-00 1857.4 55.6 Jun-95 . . Mar-96 5,008.12 5,831.73 Dec-96 22.99 11.33 Sep-96 6,968.00 4,625.00 Jan-00 108.34 -66.73 Jan-00 1764.5 70.5 Jun-96 Sep-97 Sep-98 Sep-99 Sep-00 8,903.00 7,533.00 6,814.00 7,407.00 7,064.00 5,115.00 5,588.00 6,434.00 Jan-00 Jan-00 Jan-00 Jan-00 1.46 292 802 1717 123.05 411 1099 1808 Jan-00 Jan-00 Jan-00 Jan-00 1518.3 1630.1 1814.4 4242.9 340 864.1 294.1 2323.3 Jun-97 Jun-98 Jun-99 Jun-00 505.00 923.00 1,031.00 1,096.00 117 306 753 -253 Mar-97 Mar-98 Mar-99 Mar-00 6,060.89 5,209.61 5,162.00 6,546.00 4,639.02 5,527.23 5,467.00 4,358.00 Dec-97 Dec-98 Dec-99 Dec-00 52.98 279.96 306.31 356.71 47.15 119.01 197.35 176.16 Only 3 years Fox* Sony Six Flags 265.60 807.86 159.46 888.75 5,376.62 171.13 418.47 1,332.17 82.50 230.75 4,672.03 93.61 30% 181% 16% 15% 29% 53% 93% 88% 106%

Std of Operating Income Before Depreciation Average Operating Income Before Depreciation Std of Operating Actiities - Net Cash Flow Average Operating Actiities - Net Cash Flow Vol (OIBD) Vol (OA-NCF) Vol (OIBD) / Vol(OA-NCF)

Disney AOL Viacom 1,575.95 609.47 948.29 6,956.68 493.50 2,137.93 1,274.86 676.98 791.34 5,389.35 565.04 657.93 23% 24% 96% 123% 120% 103% 44% 120% 37%

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

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