Your group is a valuation committee from an investment bank, GrandLine, which is hired by a private company, StrawHat, for a firm valuation before it goes public. Your group’s job is to provide a detailed report including a quantitative analysis using Excel and verbal explanations on the results via a pdf file (can be created from Word). While the group report will be graded under the guidelines in Part III, each group member’s grade will be adjusted by his/her peer review score. In other words, individual grade = group report score * peer review score. For example, Jessy’s case grade will be 25*80%=20 if her group report scores 25/30 and average peer review 80%.

 

I. Submission requirement

Each group only needs to submit one copy of the pdf report and Excel file named “Group # report.pdf” and “Group # excel.xlsx”. In addition, each member is required to submit a separate peer review (“Group # peer review.pdf”) for all other group members. Grade your peers from 0-10 responsibly based on your impression of his/her contribution to the final work (for example, Tom 8, Jack 7, Lisa 9, etc.).

 

Use size-11 single-space “Times New Roman” for both the report and Excel tables. In the first page of the report, list clearly the group number and member names. Follow the Excel template uploaded on Canvas for the format of the analysis.

 

II. Case study

StrawHat is a private firm which provides online gaming services similar with Electronic Arts Inc (EA). It is considering the option of going public and would like a detailed valuation analysis on the NPV of its future cash flows. Your group’s goal is to provide a concrete analysis on the firm value using the knowledge you have learned in this class.

 

1. WACC

Calculate the cost of capital for StrawHat using the excel template on Canvas. Assume the following:

1. Cost of equity.

a) Since StrawHat is currently private and has no stock price information, we can use the cost of equity of EA as an estimate. Use the daily stock prices from Jan 1^st, 2021 to Dec 31^st, 2021 to calculate daily returns for EA (ticker EA). You can find historical stock prices on Yahoo Finance.

b) Use the prices for S&P500 (ticker: SPY) to calculate the market return in the same sample period. Use 2% APR as annual risk-free rate.

c) Use CAPM to estimate beta.

d) Estimate cost of equity for EA assuming 5% annual expected market return.

2. Cost of debt

a) StrawHat currently has outstanding corporate bonds with YTM of 4% APR.

b) Use 35% effective tax rate.

3. Weights

a) StrawHat expects to raise $10 million in equity.

b) StrawHat’s corporate bonds are currently valued at $5 million.

 

2. NPV analysis

StrawHat forecasts the following for its future operations.

a) Annual sale of 100,000 memberships at $75 each.

b) Cost of goods sold of $25 for each membership.

c) Operating expenses of $3,000,000 per year.

d) Assume zero net working capital requirements (0 inventory, accounts receivable/payable, and cash).

e) An initial investment at the beginning of $7,500,000 on servers and computers, which will be depreciated straight-line to zero over the next 7 years.

f) Tax rate is 35%.

g) The investment horizon is assumed to be 7 years. After 7 years, this company’s free cash flows will terminate. No liquidation value is assumed given the nature of company.

 

3. Sensitivity analysis

Perform a sensitivity analysis for NPV under two parameters: number of memberships sold and operating expenses. There is a link for a YouTube video on the last sheet of the Excel template about “What if analysis” that should be helpful.