Investment recommendation analysis for common stock purchase based on financial research

Investing in Walt Disney Company

Characteristics of its bonds

Apparently, Disney's bonds seem to be in an enticing situation. After a dip during the past years, Disney's bonds seem to be in great demand. In June of this year -- little less than 3 months ago - it offered a 3.75% banking 10-year paper with over $25mm. This was the hot-shot then, specially in a time when post-holiday trade was lax, and investors were eager to grab it leveraging the bond's cost by eight-cents per $1,000 face worth to 100.68 consequently dipping the concede to 3.66%. (Wilkinson, 2011).

Reinforcing the optimistic perspective is that earlier this month, Walt Disney sold five-, ten- and thirty-year bonds with the lowest coupons ever in a three-part $1.85bn U.S. debt offering each of which consisted of the equivalent of $750m in each of the notes. Disney seems to be doing well since Financial News (2011) reports that this is its largest debt offering since 1996 (in which year according to Dealogic it sold a $2.6bn deal.)

All three utterances sold exceedingly well outbidding prices set by Colgate-Palmolive and Johnson & Johnson of the previous year. All yielded Disney high yields. In fact, Financial News (2011) observed that all launched at the narrow end of price guidance assessing that this is indicated good demand. Moody's Investors Service rated the deal as A2 and A by Standard & Poor. That indicates superb performance. For better comparison, Disney's performance can be compared to the Burbank, the well-known media company that sold its bonds on May 18 for $500 (information obtained from Dealogic).

These news reports are corroborated by an assessment of Disney's financial situation as showcased on Morningstar.com (one of the premier investment advising and e-trade sites). The Morningstar credit rating for Disney's bonds situation is the highest possible -- A+. Its debt is $7.7billion. Its issuer type is corporate; its overall value (Debts / Assets) is 18.62%, and its sector is consumer cyclical.

The fact, too, that Walt Disney issues -- and that people -- eagerly accept its 100-year bonds indicate the enduring popularity of Disney bonds. After all, why would a company offer bonds that exceed a person's life expectancy? And why would a company put itself at risk to offer something that very few companies do? One of the very few other multi-million companies that offer 100-year bonds is Coca-Cola. Bonds with these long maturities indicate not only the company's belief in its resilience but also an indication of consumer sentiment for the company's value. There is an especially high-demand for Disney's 100-year bond pointing to both internal and external belief of Disney's value and endurance. Altogether, analysis of Disney's mature bonds shows that institutional investors prefer these bonds since it lengthens the duration of the bond portfolios enabling them to fulfill certain goals (Investopedia: Web)

In short, most analysts predict that shares in Disney will spring back from an outing descent to the good news =- and well tested at that -- of $40.50 according them a high 10% upside (Financial News, 2011). Evaluation of the past year shows Disney doing well despite the economic downfalls of competing companies and shows that with the gradual drifting away of recession their trade -- and with that leverage of their bonds -- is picking up. As per encouragement for Disney's investors, there is a grab for Disney bonds putting them at a remarkable and almost unprecedented high. I would certainly advise investors to go for them.

2. Characteristics of Walt Disney's Optimal capital structures.

Capital structure refers to the way that a company finances its assets through its specific combination of debt, equity, or hybrid securities. In reality, there can be multiple ways in which the company finances its assets and optimizations of its capital structure (or optimal capital structure) refers to the way that Disney finances its assets so that it maximizes the value of its company.

Calculating Disney's long-term debt and common and preferred equity, Grossman and Livingstone (2009; p.147) show that Disney's capital structure consists of 20.82% long-term debt, 79.18% common equity, and 0.0% preferred equity.

Calculation of capital structure is important for determining decision to invest in a certain company or project. If the company or project is expected to provide a rate of return that exceeds the company's (or investor's input) of capital, the investor should accept and invest in that company. If, on the other hand, it shows a rate of return that is less than the company's cost of capital indications are that the company consumes rather than spends its investors' money wisely, and the company (or project) should be rejected. Disney's high rate of equity that exceeds its debt ratio shows that it is trying to raise capital in a profitable manner providing value to its investors and in a way that minimizes the cost of this capital.