be partially attributable to the market’s skepticism about
whetherNintendocanmaintaintheexcess returnsitmakes
nowforever(whichiswhatweassumedinthevaluation)and
partiallytoitsmistrustofthelargecashbalance(andwhatit
can be utilized for).
Lookingatthis firmforpotentialvalueenhancement, there
arethreepossiblechangeswecouldmake.Thefirstwouldbe
amoreaggressivegrowthposture;thevideogamebusinessis
afast-growingbusinessthatrequiressubstantialreinvestment.
Increasingthereinvestmentrate,evenifitmeanssettlingfor
alowerreturnoncapitalonnewinvestments,wouldincrease
growthandvalue.Thesecondchangeistheuseofmoredebt
infinancingthefirm;thefirmisallequityfundednowand
couldeasily supporta debtratioof 20%withoutexposing
itselftosignificantdefaultrisk.Thethirdisareductioninthe
cash balance. We revalued Nintendo with the following
changes to fundamentals:
- Anincreased reinvestmentrateof40%forthenext
fiveyearsinconjunctionwithareturnoncapitalof
7.50%willincreasetheannualgrowthrateoverthe
periodto3%.Afteryear5,wewillassumeagrowth
rate of 2%, with a consistent reinvestment rate.
7 - Adebtratioof20%,togetherwith apretaxcost of
debtof3%,lowersthecostofcapitalforthenextfive
years to 6.49%and in perpetuityto 5.84% (as we
drop the beta to 1). - Asignificantreductioninthecashbalancetoabout
200 billion yen should decrease or dissipate the
discountthat themarket is attachingto cash. (The