ensure proposed strategies improve value B u s i n e s s F i n a n c e
The following case will utilize your 5 year forecast of Ubisoft Entertainment SA’s (“Ubisoft” or “the
Group”) financial statements to value the business. This case involves a discounted cash flow
approach 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, evaluate
acquisitions 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 future
Free Cash Flow. The discount rate applied to the future Free Cash Flow is the WACC. This is the
weighted 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 plus
the value of debt. To calculate the value of equity use the total number of shares outstanding
multiplied by the current market price per share. To calculate the value of debt, add the value
of short term financial debt plus the value of long term financial debt from the 2020 balance
B. Calculate the cost of equity based on the Capital Asset Pricing Model (CAPM). Estimates for
Risk Free Rate and Market Risk Premium (MRP) and provided in the assumptions section at
the end of the case. (You will need to calculate the ß (beta) for Ubisoft based on comparable
U.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 rate
of 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 debt
securities outstanding with each having a different interest rate based on varying maturities or
provisions in each debt agreement.
D. Calculate the WACC based on the estimated rates of return on debt and equity and weights