Case 5 – Business Valuation
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
Part II – Free Cash Flow (FCF)
A. Based upon your 5 year forecast of Ubisoft’s financial statements, calculate FCF for each year
of the forecast period. Feel free to revise your forecast from the prior case as needed.
B. Ubisoft is a strong company and will likely continue to operate and generate FCF after the
forecast period. Analyst’s typically capture the value after the forecast period in a Terminal
Value calculation (also called horizon value or continuing value). Please calculate the terminal
value for Ubisoft.
Part III – Valuation
With estimates in place for WACC and future FCF, you are now able to calculate a discounted cash
flow based valuation for Ubisoft.
A. Based on your estimates, what is the total value of Ubisoft? The total value of the firm would
be the present value of all future FCF plus the current value (2020) of any non-operating
assets not included in the forecast. Non-operating assets are typically financial in nature,
such as cash & equivalents, marketable securities, and short and long term investments.
B. What is the estimated value of equity?
C. What is the estimated value per share of common stock?
Part IV – Sensitivity Analysis
The estimated value of Ubisoft is based on many assumptions related to the future performance
of the business and investor return expectations. Analysts spend a lot of time trying to put an
accurate forecasts in place, but the probability of every single input being accurate is virtually
zero. Sensitivity is a form of risk analysis to help identify which forecast assumptions are most
material and how changes to these assumptions impact the valuation.
Perform a sensitivity analysis on the following variables:
• Growth rate of sales
• Operating margin
• Operating cycle
• Choose 1 – 2 other variables
Part V – Recommendation: Market value vs. calculated value
Compare your estimate of per share value of common stock to Ubisoft’s current market price.
• Is your estimate higher or lower than the market price? What factors are likely
contributing to the difference?
• If you were an equity analyst, would you recommend a Buy, Hold or Sell on Ubisoft stock
• Yield to Maturity (YTM) on 10 year French government bond (risk free rate): 0.67%
• Market risk premium for France: 5.65%
• Ubisoft’s stock price €70.04 per share