Business Valuation Discussion
The following case will utilize your 5 year forecast of Ubisoft Entertainment SAs (Ubisoft or theGroup) financial statements to value the business. This case involves a discounted cash flowapproach to value Ubisoft at a total company level as well as a value per share of common stock.Companies will maintain valuation models to ensure proposed strategies improve value, evaluateacquisitions and divestitures, sale or repurchase of financial securities, etc.
Part I Weighted Average Cost of Capital (WACC)Under the Discounted Cash Flow method, the value of a business is the present value of all futureFree Cash Flow. The discount rate applied to the future Free Cash Flow is the WACC. This is theweighted average return that equity and debt investors expect based on the risk of the business.
A. Calculate the weights (mix) of debt and equity the company is utilizing as of March 31, 2020(2020). The weights can be estimated by using the current market values. For example,the weight of equity would be the value of equity divided by the sum of value of equity plusthe value of debt. To calculate the value of equity use the total number of shares outstandingmultiplied by the current market price per share. To calculate the value of debt, add the valueof short term financial debt plus the value of long term financial debt from the 2020 balancesheet.
B. Calculate the cost of equity based on the Capital Asset Pricing Model (CAPM). Estimates forRisk Free Rate and Market Risk Premium (MRP) and provided in the assumptions section atthe end of the case. (You will need to calculate the ß (beta) for Ubisoft based on comparableU.S. companies – see PowerPoint slides for formulas.)
C. Calculate the after tax cost of debt. To arrive at a cost of debt for the company use the rateof return debt investors are currently expecting from the company and then multiply by (1 tax rate). Many companies which utilize debt as a source of financing have multiple debtsecurities outstanding with each having a different interest rate based on varying maturities orprovisions in each debt agreement.
D. Calculate the WACC based on the estimated rates of return on debt and equity and weightscalculated above.