Module 4 Case Study

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Apr 3, 2024

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1 Module 4 Case Study: Walt Disney Financial Risk Tyesha Williams Southern New Hampshire University FIN 320: Principles of Finance Professor Suleman Braimah February 3, 2024

2 Two different types of risk impact the value of a company’s investments and those two risks are systematic and unsystematic. These two risks differ specifically in how they are managed, resources, and impacts. Therefore, systematic risk identified also as market risk or non-diversifiable risk impacts the whole market or economy collectively. This risk is unpredictable and “cannot be eliminated through diversification” (Titman, et al., 2018). Inflation, natural disasters, political instability, and interest rate changes are just a few systematic risks. Conversely, unsystematic risk is identified also as a specific risk, diversifiable risk, or idiosyncratic risk. This risk is based on specifics and can be eliminated through diversification (Titman, et al., 2018) with investing in the company’s diverse assets. Product recalls labor strikes, and management changes are a few examples of unsystematic risk. Overall, systematic, and unsystematic risks affect a company’s investments differently through management and resources. Financial risks also impact the business whether it is interest rate risk, economic risk, credit risk, and operational risk. Interest rate risk is a potential risk that is incurred if interest rates change which causes a loss to an investment. Walt Disney could be impacted specifically by cost correlated with borrowing. Therefore, if interest rates increase, borrowing costs increase, and as a result, there will be a reduction in profits. The potential risk for Economic risk pertains to the economic environmental changes that impact the business. Moreover, Walt Disney could face this potential risk with consumer spending due to unforeseen downturns of the economy resulting in consumer spending decreasing which will affect the company’s revenue as a whole. Since Disney is a global company, there is also a potential risk that will affect their revenue due to the fluxes in exchange rates. Furthermore, credit risk is a risk where the borrower is unable to pay off a loan. If Disney is unable to repay a loan, the company’s receivables and investments

3 would be impacted by a loss. Specifically with investments, the company in which Disney has invested bonds could default therefore causing the company to lose out on its investment. Lastly, operational risk is “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events” (FDIC, 2006). System failures and human error are risks that can occur for Walt Disney. The company’s IT system could crash, which causes a loss to its revenue as well and employees could make simple errors resulting in Disney’s reputation being hurt and more financial losses. A reduction in sales growth will have a substantial effect on Walt Disney’s dividend policy and retained earnings. The monetary value of profits shapes the company’s dividend policy therefore, if there is a reduction in sales growth, shareholders’ payment of dividends will be decreased. However, if Disney decides to pay its shareholders dividend regardless of lower sales growth, the company’s assets could be strained, and the company could take a long time to recover from the loss. When the pandemic started in 2020 Disney had to suspend its dividend payments to their shareholders due to the reduction in sales growth. Disney reinstated their dividend payments on January 10, 2024. Furthermore, lower sales growth impacts retained earnings by decreasing profits, and as a result, the company may not be able to invest in the business. Disney could choose to increase their retained earnings to fund potential growth. A higher growth sale could be significantly beneficial for Walt Disney or any company. With greater sales growth Walt Disney’s profit could increase, which would be a positive for the company. The company took a huge hit from the pandemic causing sales and consumer spending to decrease. However, now that the Pandemic has dwindled down, Walt Disney has seen growth in sales in many of its sectors. Therefore, Walt Disney is able to pay their shareholders and opt to pay more to its shareholders. The company could also take the increase and put back into its

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4 investments. Retained earnings are the profits that are not included into the dividends paid to the shareholders and these funds are used to reinvest. Therefore, if there is an increase in sales, the company’s retained earnings increase and this allows the company to expand in other markets, research, and development, and even pay off any debt. Walt Disney could also decide not to use those retained earnings for expansion, research and development, and debt payments, but put more into the dividend payments. Overall, Walt Disney is doing great and will continue to strive and grow.

5 References Investor relations - stock information, events, reports, financial information, shareholder information. The Walt Disney Company. (2023, December 6). https://thewaltdisneycompany.com/investor-relations/ Operational risk management: An evolving discipline. (2006). https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum06/ sisummer06-article1.pdf Titman, S., Keown, A., & Martin, J. D. (2018). Financial Management: Principles and Applications.