Toestimatethecostofcapital,weuseabottom-upbetaof1.2
(reflecting the risk of video gaming companies), a yen
risk-freerateof2%,andamarketriskpremiumof4%.The
cost of equity can then be estimated:
Nintendohasnodebt,makingitscostofcapitalequaltoits
costofequityof6.8%.Withtheperpetualgrowthof0.427%,
theexpectedfreecashflowtothefirmof63.63billionyen,
andthecostofcapitalof6.8%,weobtainavalueforthefirm
of:
Addingbackcashandmarketablesecuritieswithavalueof
717.76billionyenyieldsavaluefortheequityof1,716.24
billionyenandavaluepershareof12,114yen(basedonthe
141.669millionsharesoutstanding).Thestockwastradingat
11,500 yen per share in July 2005, at the time of this
valuation.
Itis entirelypossible thatNintendo’smanagement isbeing
muchtooconservativeonbothitsreinvestmentpolicyandits
useof debt,and thatthefirmcouldbe worthsubstantially
moreiftheywereaggressiveonbothcounts.InChapter13,
wewillreturntoexaminethisquestioninthelargercontext
of the value of control.
General Version of the FCFF Model
Ratherthanbreakthefreecashflowmodelintotwo-stageand
three-stagemodelsandriskrepeatingwhat wassaidin the