Question

Bandai is a private company. Assume that this company will be fully owned by its private owner for the first year (year 1), will access technology venture capitalist in year 2, and is expected to go public at the end of year 2. The long-term growth rate is 2% forever after year 2. The publicly-traded peer companies have an average beta of 1.2. The correlation of Bandai with the market is 0.3 at the private company stage, and 0.6 at the venture capital stage. The company is all equity funded (no debt). The risk-free rate is 2% and the market risk premium is 4%. What is Bandai’s firm value?

Below is Bandai's free cash flow (FCF);

	Year 1	Year 2	Terminal year
FCF	118	121	144

Select one:

a. $2,695.91

b. $930.70

c. $1,694.88

d. $3,200

e. $2,679.34

Answer 1

Beta of Bandai as a private company = Industry average beta/correlation = 1.2/0.3 = 4

Beta of Bandai at VC stage = Industry average beta/correlation = 1.2/0.6 = 2

Beta of Bandai at public company stage = Industry average beta= 1.2

So, from CAPM

cost of equity/required rate of return of Bandai as a private company = 2%+4*4% = 18%

cost of equity/required rate of return of Bandai at VC stage = 2%+2*4% = 10%

cost of equity/required rate of return of Bandai at public company stage = 2%+1.2*4% = 6.8%

Now, Terminal Value of company = Terminal Cashflow/ (required rate - forever growth rate)

= 144/ (0.068-0.02) = $3000

Now, Value of company today = 118/1.18+ 121/1.1^2+3000/1.1^2 = $2679.34 (option e)