Nintendo, the Japanese manufacturer of video games,
presented an interesting picture at the start of 2005. The
companyreported 443 billionyen in revenuesfortheyear
endedMarch 2005,roughly thesamelevel as ithad three
years earlier. Its operating income for the year was
approximately 100 billionyen. Thecompanyhad amarket
value of equity of about 1,600 billion yen, no debt
outstanding,andacashbalanceof 717 billionyen(about45%
of overall firm value).
Overthepreviousfewyears, Nintendohad reinvestedvery
littlemoneyintoitsoperatingassets,anditsreinvestmentrate
for themost recent year wasabout5%. Cutting costs has
allowedthecompanytogenerateahealthyreturnoncapital
of8.54%onitsexistingassets,wellaboveitscostofcapital
of6.80%.If weassumethatitcanmaintainthis returnon
capitalandreinvestmentrate,theexpectedgrowthrateisonly
0.43%.
Valuing Nintendo as a stable-growth firm, we arrive at a
valuefortheoperatingassetsof 999 billionyen(taxrate=
33%):
Addingonthecashbalanceof 717 billionanddividingbythe
numberofsharesoutstanding,weestimateastatusquovalue
of12,115yen/share,about8%higherthanthethenprevailing
marketpriceof11,300yen/share.Thelowermarketpricecan