Description
What am I required to do in this assignment?
You are an equity investment analyst in a major investment bank in the city of London. As part of your job at the bank, you regularly carry out financial and operational performance analysis of companies listed on the London and Global Stock Exchanges addressed to an institutional client of the bank.
Requirements
Carry out a further detailed analysis on one of the listed companies you selected for the first group assignment. (Nintendo)
Your report should include
I. Capital Structure Choices
What are the different kinds or types of financing that your company has used to raise funds? Where do they fall in the continuum between debt and equity?
How large, in qualitative or quantitative terms, are the advantages to the company from using debt?
How large, in qualitative or quantitative terms, are the disadvantages to the company from using debt?
From the qualitative trade off, do the firms look like they have too much or too little debt?
II. Optimal Capital Structure
Based upon the cost of capital approach, what is the optimal debt ratio for your firm?
Does your company have too much or too little debt relative to the sector and the market?
Recommend a different capital structure for your company. Explore different types of
of financing this firm can use, and in particular, long vs short term, different currencies, and special features.
III. Dividend/Stock Buyback Policy
How has the company returned cash to their owners? Has it paid dividends or bought back stock?
How much cash have the has it accumulated over time?
How does your company dividend policy compare to its peer group and to the rest of the market?
Would you recommend a different dividend policy for the company?
In particular, given the characteristics of the firm today, how would you recommend that they return that cash to stockholders (assuming that they have excess cash)? In what form (dividend or buybacks?)
Unformatted Attachment Preview
CORPORATE FINANCE ……………………………………………………………………………………………………………………..3
CORPORATE GOVERNANCE ANALYSIS ………………………………………………………………………………………………..3
SEPARATION BETWEEN MANAGEMENT AND OWNERSHIP, RESPONSIVENESS OF THE MANAGEMENT TO STOCKHOLDERS …………….. 3
POTENTIAL CONFLICTS OF INTEREST ……………………………………………………………………………………………………………. 5
FINANCIAL MARKETS …………………………………………………………………………………………………………………………….. 5
APPROACH TO SOCIAL OBLIGATIONS AND IMAGES …………………………………………………………………………………………… 6
RISK AND RETURN ………………………………………………………………………………………………………………………….8
STRATEGIC AND OPERATIONAL RISK: ……………………………………………………………………………………………………………. 8
LEGAL AND COMPLIANCE RISK: …………………………………………………………………………………………………………………. 8
FINANCIAL RISK: ………………………………………………………………………………………………………………………………….. 8
RETURN ON INVESTMENTS ………………………………………………………………………………………………………………………. 8
PERFORMANCE IN THE MARKET ………………………………………………………………………………………………………………… 9
COST OF EQUITY ………………………………………………………………………………………………………………………………….. 9
Risk-Free Rate ……………………………………………………………………………………………………………………………. 10
Beta …………………………………………………………………………………………………………………………………………. 10
Marked Risk Premium ………………………………………………………………………………………………………………… 10
CAPM ……………………………………………………………………………………………………………………………………….. 11
COST OF DEBT …………………………………………………………………………………………………………………………………… 11
RISK OF DEBT ……………………………………………………………………………………………………………………………………. 12
CURRENT COST OF CAPITAL……………………………………………………………………………………………………………………. 12
Capital Structure ……………………………………………………………………………………………………………………….. 12
Tax Rate ……………………………………………………………………………………………………………………………………. 13
WACC ……………………………………………………………………………………………………………………………………….. 13
MEASURING INVESTMENTS RETURNS ……………………………………………………………………………………………… 14
Nintendo:………………………………………………………………………………………………………………………………….. 14
Electronic Arts: ………………………………………………………………………………………………………………………….. 14
Sony: ………………………………………………………………………………………………………………………………………… 14
RETURN ON ASSETS …………………………………………………………………………………………………………………………….. 15
RETURN ON EQUITY: …………………………………………………………………………………………………………………………… 15
REFERENCE …………………………………………………………………………………………………………………………………. 16
Corporate Finance
EA Inc & Nintendo & Sony
Corporate Governance Analysis
Separation between management and ownership, responsiveness of the management to stockholders
Electronics Art Incorporation, also known as EA Inc, is a publicly owned company as of September
1989. The company information posted on NASDAQ states that about 92% is owned institutionally.
Blackrock Inc is currently the largest shareholder, holding a near 10% stake in the company. Other
major investors include Vanguard Group Inc. and the Public Investment Fund, further contributing to
the institutional ownership profile.
According to the Corporate Governance guidelines and the proxy statements of EA Inc, there are 3
main bodies: the shareholders, The Board of Directors and the executive management. Eligible
Stockholders (who are defined as stockholders or beneficial owners who own shares that represent at
least 3% as of the date of the stockholder notice and as of the date of the annual meeting) elect the
two-tier Board of Directors who then appoints the CEO and oversees the operations of the
management, in order to protect and ensure the best interests of the shareholders. Engagement in the
election of the Board ensures that stockholders can be involved in the company management
(weighted by the sum of the shares owned)
To further align the incentives of the management with the incentives of the company, EA has a policy
that requires members of the executive management and the board of directors to be shareholders,
following this policy each member of the executive management and of the Board of Directors is
compensated via shares according to their base salary. Managers become owners of the company,
which aligns with incentives to act in the best interest of the stockholders as the management itself is
also a stockholder.
Proxy access is granted to all shareholders, ensuring that each share confers one vote, and thereby
upholding the principle that the shareholder’s voice is proportional to their equity stake. This policy
underscores the democratic nature of corporate decision-making processes at EA, providing a direct
channel for shareholder engagement and influence over corporate governance.
After thorough examination and analysis of EA Inc’s bylaws, annual statements and proxy highlight, it
can be concluded that EA Inc has a separation between ownership and management; and the
management is responsive to eligible stockholders’ wishes however, not as responsive to shareholders
who do not have high stakes.
Nintendo Co. Ltd, is a Japanese gaming company known for iconic games like Super Mario,
Pokémon and innovative consoles like the Nintendo DS and Game Boy, founded in 1889 and has been
a titan in the industry ever since. It went public in 1962 on the Tokyo Stock exchange allowing it to
raise capital and transition to multinational conglomerate.
Like EA, Nintendo adopts stakeholder theory. The two-tier board system utilized by Nintendo ensures
a separation of powers between the oversight and management functions, providing a clear structure
for corporate governance. This structure consists of a Board of Directors and a Board of Counsellors
(also known as the Audit & Supervisory Board in some interpretations), where the former primarily
makes strategic decisions and the latter oversees the execution of these strategies and the company’s
operations, ensuring legal and ethical compliance. Directors are tasked with appointing the company’s
executive officers, who are charged with the day-to-day management of the company, thereby
upholding a clear distinction between oversight and management.
Management appears to be responsive to stockholders through the structure of the Board of Directors,
which includes outside directors to ensure independent oversight, and through the Audit and
Supervisory Committee, which includes members elected by shareholders. Furthermore, the presence
of the Nomination Advisory Committee suggests a system is in place to ensure that the Board reflects
shareholder interests in matters of nomination and compensation.
In conclusion there is a separation between management and ownership in Nintendo which has
adopted a Company with Audit and Supervisory Committee structure, where operational execution is
separated from management decision-making. Management is responsive to stockholders through the
structure of the Board of Directors, considering the presence of the Nomination Advisory Committee
suggests a system is in place to ensure that the Board reflects shareholder interests in matters of
nomination and compensation.
Sony Group Corporation, otherwise known as Sony, is a powerhouse in the consumer electronic,
entertainment and gaming industry. Established in war-torn Tokyo, Japan in 1946, Sony has since
become a leading multinational conglomerate. With the PlayStation brand, Sony has become a
household name in the gaming sector. Listed on both the Tokyo Stock Exchange and the New York
Stock Exchange, reflecting its global presence in financial markets, the largest shareholder is
Primecap Management company, currently holding about $2billion worth of shares. Interestingly,
Blackrock Inc also holds a considerable number of shares, currently standing at about $300 million.
Another common holder, who is also a major shareholder in EA Inc, is Vanguard, though in this case
it is a mutual fund holder.
After examining the corporate report 2023, in which it has been stated that Sony adapted the
Company with Three Committees in 2003, there is a separation between ownership and management.
Similarly, Sony is publicly listed, hence the ownership of the company is via the ownership of shares.
Sony’s governance structure includes a Board of Directors with a strong emphasis on independent
outside directors to ensure objective and transparent oversight. With a separate oversight function of
the Board and a management function for the executive team, Sony maintains a balance between
quick, efficient decision-making and thorough, effective supervision. The Board is tasked with
oversight duties such as reviewing and approving management policies and their progress, while the
management team is responsible for operational outcomes, maintaining accountability to the Board.
To evaluate the responsiveness of the management to the shareholders, the last 4 Shareholders’
Meetings were examined. Sony is committed to building trust with shareholders and investors. This is
achieved through constructive engagement with these stakeholders, primarily facilitated by the Senior
Vice President and the department responsible for investor relations. From the matters reported and
the matters acted upon, it is safe to say that Sony’s executive management remains highly responsive
to the shareholders’ wishes and concerns.
In conclusion, Sony operates with a clear demarcation between management and ownership.
Management’s responsiveness to stockholders is highlighted by the composition of the Board and the
governance system that emphasizes accountability and stakeholder engagement. This separation
ensures that Sony can pursue its strategic goals while maintaining a governance structure that
protects shareholder interests.
Potential conflicts of interest
A conflict of interest arises when an executive encounters a situation where the official actions may
benefit or harm the private interest (Demski, J. 2003) EA, Nintendo and Sony are public, and have
nearly the same executive structure. That is why this analysis will not separately focus on each
company but rather aim to generalize such conflicts and drive a global conclusion.
In public companies, conflicts of interest can manifest in various forms, intertwining personal
interests with professional duties. Executives or board members might face conflicts due to personal
financial stakes in competing firms or through familial and personal relationships influencing hiring
or business decisions.
Agency theory states that the appointed directors may act in favor of their personal interests instead of
the stockholders’, failing to optimize firm value in general. (Musa et al.,2022) Even though the
companies have integrated policies to reduce conflicts of interest to the minimum, as mentioned
above, Agency theory, as for many large corporations, holds for EA, Nintendo and Sony too. Though
the board (the director) is elected by the stockholders, they may put their own benefit over the
stockholders’ (the principal) by, for example, incentivizing for bigger board compensations.
Other potential conflicts of interest regarding unfair transactions within or with the company have
been considered by EA. In the proxy highlights under Board Policies, a Related Persons Transaction
Policy section is found. The policy states the procedures used to process, evaluate, and, if necessary,
disclose transactions between the Company and its directors, officers, director nominees, greater than
5% beneficial owners, or an immediate family member of any of the foregoing. (Annual Meeting and
Proxy Statement, 2023)
Financial Markets
There are numerous ways firms interact with markets. For public companies, such ways include
issuing stocks and/or bonds, paying dividends, publishing financial reports and hosting Investor
Relations activities. This is a crucial point for firms to not only raise capital but maintain investor trust
and market position.
Stock issuance and trading, EA, Sony, and Nintendo have their shares publicly traded on major stock
exchanges. The performance of their stocks is a direct reflection of investor sentiment and confidence
in their business strategies, operational efficiency, and future growth prospects.
In terms of how markets obtain information about these companies, public disclosures and financial
statements are primary sources. They provide comprehensive views of the companies’ financial
status. Press releases and official announcements about new product launches, partnerships, and
executive changes also offer timely and relevant information to the market. Financial markets also
rely heavily on analyst reports and recommendations. These reports, prepared by financial experts and
industry analysts, provide in-depth analysis, future earnings projections, and investment
recommendations, influencing investor perceptions and market responses.
Approach to Social Obligations and Images
Firms often view their social image as a critical component of their corporate identity and business
strategy. EA is no different. As detailed in the Social Impact in Fiscal Year 2023 report, EA views
their social obligations as not just obligations or add-ons to its business but rather an essential part of
their modern corporate principle. Their approach is multifaceted and aims to reflect the company’s
broad role in society.
Firstly, EA commits to education and empowerment. STEAM education is seen as a crucial area
where the firm can make a significant impact, particularly for underrepresented communities. By
investing in educational initiatives and partnering with non-profits, EA aims to inspire and empower
the next generation, aligning with its expertise in technology and gaming. A total of $1 million was
spent on STEAM education and equity through the Madden Legacy Foundation in 2023. Their efforts
in this area align closely with their expertise in technology and gaming, thereby creating a bridge
between their corporate interests and social responsibilities.
EA also demonstrates a commitment to inclusivity and social justice. For example, it has contributed
over $1.3 million to organizations fighting discrimination and promoting equality, like Lambda Legal
and the ACLU Foundation. This reflects EA’s broader mission to address systemic social issues.
Employee engagement is another key aspect of EA’s approach. The company encourages its
workforce to participate in community service, matching their donations and providing paid volunteer
time. An example of this is their policy of offering a $1,000 donation to a non-profit of choice for
employees who log 40 volunteer hours.
Lastly, EA leverages its gaming platforms for social good. Notable initiatives include charity events
like “Gaming For Love,” hosted by musician Post Malone, which raised over $200K for various
organizations, integrating EA’s gaming expertise with philanthropic efforts.
In summary, EA’s approach to social obligations is a blend of educational support, advocacy for
inclusivity, employee-driven philanthropy, and using its gaming platforms for charitable causes,
demonstrating a comprehensive and integrated approach to corporate social responsibility.
Nintendo’s all-round CSR philosophy is centered on the goal of putting smiles on the faces of
everyone Nintendo touches. Nintendo’s approach to social responsibility and image management is
anchored in its motto. This commitment leads their actions across 4 main domains: consumers, supply
chain, employees, and the environment.
In the consumer domain, Nintendo focuses on providing safe, high-quality products and services
while ensuring consumer privacy. This commitment is evident in their adherence to rigorous safety
standards, including compliance with the U.S. Consumer Product Safety Improvement Act, which
underscores their dedication to creating products that are safe for all ages. Nintendo’s development
process includes adherence to Design Safety Rules and assessments by a diverse Design Safety Review
Committee.
In terms of its supply chain, the company aims to improve working conditions at production sites and
maintain robust CSR procurement practices, recognizing that this leads to higher product quality and
customer satisfaction. Employee welfare is a critical focus, with initiatives aimed at fostering diversity
and creating an empowering work environment. Such claims are supported by the evidence in the
company’s regular CSR reports.
Internal awareness and training are pivotal in Nintendo’s CSR strategy. In Japan, seminars for new
recruits are conducted to foster understanding of CSR. In America, the CSR Committee plays a vital
role in training and disseminating information. In Europe, new employees receive comprehensive
onboarding sessions that include overviews of the CSR Committee and Subcommittees, supplemented
by employee surveys to tailor CSR approaches to regional needs. In Australia, the focus is on
engaging employees with local community events and conducting CSR training for new recruits.
Lastly, environmental initiatives address climate change, efficient resource use, and reducing the
environmental impact of products and operations, reflecting Nintendo’s commitment to sustainability.
To ensure the effectiveness of its CSR initiatives, Nintendo regularly reviews and revises its priority
areas. This global-local approach is further evidenced in their CSR coordination, with the CSR
Promotion Project Team and various CSR promotion teams in major subsidiaries outside Japan
working together to ensure that global strategies are effectively adapted to regional needs.
Overall, Nintendo’s comprehensive approach to CSR demonstrates a deep commitment to upholding
its social obligations and managing its social image effectively. By focusing on these areas and
continuously adapting their strategies, Nintendo aligns its CSR initiatives with its overall mission of
delivering entertainment and happiness.
Sony follows a similar approach in the social area to Nintendo. Guided by its purpose to fill the world
with emotion, through the power of creativity and technology, Sony’s approach to Corporate Social
Responsibility (CSR) reflects its commitment to sustainable value creation and corporate growth. This
is achieved through trust-building dialogue and innovative, sound business practices.
A key aspect of Sony’s CSR is their dedication to social contribution activities, encapsulated in their
slogan “For the Next Generation.” This involves leveraging their products, technologies, and
employee strengths in global and regional programs like CurioStep, KANDO Experience, and the
Sony Creative Science Award. These initiatives primarily focus on empowering children’s curiosity
and dreams, especially in STEAM (Science, Technology, Engineering, Art, Mathematics) fields.
Sony also operates several charitable foundations like the Sony Music Foundation and Sony
Education Foundation, which support a range of causes from music education to community
betterment.
Additionally, their humanitarian efforts are notable, particularly through collaborations with
organizations like Save the Children and the establishment of “The Emergency Disaster and Recovery
Fund for Children,” reflecting a commitment to providing relief in global crises.
Overall, Sony’s CSR approach integrates business innovation with a deep sense of social
responsibility, aiming to contribute to a sustainable and equitable society.
Risk and Return
We aim to present and analyse four key risk areas – operational, strategic, legal and compliance, and
financial risk – for the three companies. We will explore the origins of the risks for these companies
and examine how their risk profiles evolve. All the information for this analysis is taken from the
company’s annual reports for 2020 to 2023.
Strategic and operational risk:
Both Sony and Nintendo contain significant strategic risks stemming from active investments,
including acquisitions, joint ventures, and capital expenditures. Sony faces challenges in M&A with
regulatory hurdles, and joint ventures may encounter risks tied to cultural differences. Nintendo
confronts strategic uncertainties tied to industry shifts and competition, necessitating constant
adaptation to evolving consumer preferences. EA contends with substantial gaming industry risks,
encompassing increased competition, challenges in innovation, and dependence on third-party
platforms. EA prioritizes adaptability to industry changes. Operationally, Sony faces risks associated
with ongoing R&D investments, potential product success hurdles, and maintaining customer
demand. Nintendo deals with risks related to entertainment trends and COVID-19-intensified
operational challenges. For EA, the pandemic heightens operational risks, impacting productivity and
liability, emphasizing the need for flexibility in managing these impacts, crucial for business
operations.
Legal and compliance Risk:
Sony faces significant challenges related to complex international regulations affecting marketing,
consumer protection, import and export, anti-corruption, competition laws, environmental protection,
privacy, labour, tax, foreign investments, and economic sanctions. Violations of these rules can lead to
fines, sanctions, and reputational damage. Nintendo faces risks such as product liability, challenges in
enforcing intellectual property rights, unauthorized system access, and changes in laws, all of which
can impact its finances and reputation. EA encounters substantial risks associated with complex,
globally regulated consumer protection and privacy laws, with violations potentially leading to
sanctions, increased costs, and reputation challenges. Regulations from payment card organizations
and legal changes, particularly related to gambling in games, pose additional threats to EA.
Financial Risk:
Sony is significantly influenced by economic trends in major markets, especially Japan, the USA, and
Europe, which constitute a substantial portion of the company’s revenue. Economic downturns in
these markets can reduce consumption and demand for Sony’s products, impacting operational results
and financial conditions negatively. Political or economic instability in certain regions can disrupt
business operations, and currency fluctuations pose a considerable risk despite Sony’s attempts to
reduce currency risk. Nintendo faces risks associated with currency fluctuations, as over 70% of the
company’s sales come from international markets. Fluctuations in exchange rates affect not only the
conversion of foreign currency to yen but also revaluation for accounting purposes. This can have a
negative impact on Nintendo’s financial position, operational results, and cash flow. To mitigate the
impact of currency fluctuations, Nintendo conducts ongoing purchases in foreign currency. EA is
exposed to currency and interest rate fluctuations due to its significant international operations. With
57 percent of net revenues from international sales, fluctuations in exchange rates affect reported
revenues and operating costs.
Return on Investments
The average yearly return calculated is highest for Sony at 23.25% followed by Nintendo at 17,27%
and EA at 7,93%. However, investing involves risk, and the standard deviation, which measures
return spread, is almost similar for all companies. This implies comparable risk levels. Utilizing
standard deviation, we calculate the Sharpe Ratio, indicating return relative to risk. A higher Sharpe
Ratio signifies better risk-adjusted return. Following formulas were used:
Beta, which will be elaborated later, is a risk measure. A beta below 1 suggests lower risk and
volatility compared to the market index (S&P 500 and Nikkei 225).
Average yearly return
Standard Deviation (5 y)
Sharp Ratio
Beta
Electronic Arts
7.93%
36.48%
4.15
0.59
Sony
23.25%
37.99%
11.69
0.95
Nintendo
17.27%
34.59%
9.54
0.51
Table 1 – Risk and Return
Investors seeking higher returns may find Sony attractive, but they should be aware of its higher
volatility. Nintendo presents a balance between return and risk, while EA has a lower return with
moderate risk. The beta values provide insights into how these companies move in relation to the
market.
Performance in the Market
According to the analysis of the companies’ average annual stock returns over the past five years, as
well as the use of the Capital Asset Pricing Model (CAPM), it appears that all three companies—EA,
Sony, and Nintendo—are undervalued. These findings suggest a potential market undervaluation of
the stocks of all three companies relative to risk and return.
Electronic Arts
Sony
Average yearly return
7,93%
23,25%
Calculated CAPM
7,05%
7,49%
Performance in market Undervalues
Undervalued
Table 2 – Performance in the market
Nintendo
17,27%
0,36%
Undervalued
Cost of Equity
To calculate the three companies cost of equity, following formula is used, also known as the Capital
asset pricing model:
E(Ri) = RF + bi [E(RM) – RF]
Risk-Free Rate
Rf, the risk-free rate, reflects the expected return on a risk-free investment. For EA, the US
Government Bond Yield for 10 years, currently at 4.40%, is used. Sony and Nintendo employ the
Japan Government Bond Yield for 10 years, standing at 0.74%. To ensure the utilization of the most
recent data available, we updated the risk-free rate up until the latest date, which is November 28,
2023. (Bloomberg, 2023).
Risk-free Rate US
4,40%
Risk-free Rate Japan
0,74%
Table 3 – Risk-free rates for US and Japan (Bloomberg, 2023)
Beta
Beta measures the relationship between a security’s price movements and the overall market’s
movements. It quantifies this relationship by comparing the covariance of the security with the market
to the variance of the market (Hiller, et al., 2021). The formula is as following:
=
( , )
( )
In our analysis, we utilized a five-year data set comprising daily stock prices for the three companies.
These prices, along with the corresponding daily values of the S&P 500 and Nikkei 225, were input
into Excel market index. This method generated the most accurate figures possible. Subsequently, we
calculated both the variance and covariance of these price changes. The betas were calculated as
following:
( ) =
4,01%
= 0,59
6,81%
( ) =
5,55 %
= 0,95
5,82%
( ) =
2,97 %
= 0,51
5,82%
Several factors can contribute to the disparity in betas, and one such factor is the proportion of debt.
High levels of debt can lead to a higher beta as companies become more sensitive to changes in
economic conditions (Liberto, 2023). In our capital structure analysis, Sony has a higher debt
proportion at 61%, potentially influencing its elevated beta of 0.95. In contrast, EA and Nintendo,
with lower debt ratios at 15% and 7%, respectively, exhibit somewhat lower betas.
Marked Risk Premium
= −
For ‘Expected return,’ we have utilized data from the past five years using the following formula. This
provides an indication of the expected returns from the two markets.
1
01.11.2018 5
=
−1
01.11.2023
This makes following Expected Returns:
By subtract the risk-free rate mentioned above, this makes the market risk premium for EA 4,50%,
and for Sony and Nintendo it will be 7,08%. Market Risk Premium is the additional return investors
demand for investing in the stock market compared to a risk-free investment (Chen, 2022).
CAPM
Electronic Arts
Sony Group
4,40%
0,74%
0,59
0,98
8,90%
7,82%
4,50%
7,08%
7,05%
7,68%
Table 4 – Capital Asset Pricing Model
Risk-free rate (Rf)
Beta (bi)
Expected Return (E(Rm))
Market Risk Premium [E(RM) – RF]
CAPM (E(Ri))
Nintendo
0,74%
0,66
7,82%
7,08%
5,41%
Table X shows that the calculated cost of equity for EA is 7,05%, for Sony it is 7.68%, and for
Nintendo it is 5.41%. A high percentage in the CAPM indicates that investors demand a higher return
to assume the risk associated with the investment (Kenton & Mullins, Jr. , 1982).
Cost of Debt
To calculate the Cost of Debt we used the yield to maturity approach for our calculations. The formula
used to find yield to maturity was as followed:
=
Data for the interests paid are taken from the companies Income Statement, and their Total Debt is
taken from their balance sheets. All the amounts are taken from Refinitiv.
Cost of Debt
Electronic Arts Sony Group
Nintendo
Interests Payed 2022 (in millions) $
56 ¥
195 ¥
1
Total Debt 2022 (in millions)
$
6,166 ¥
184,479 ¥
4,427
Cost of Debt
2.98%
0.70%
0.02%
Table 5 – Cost of Debt
Generally, the cost of debt is expected to be higher than the risk-free rate because debt inherently
carries more risk than risk-free securities such as government bonds. To ensure that the calculated
Cost of Debt exceeded their respective Risk-Free Rates, ad-hoc percentages were added—1% for the
Japanese companies and 2% for the US company. The higher ad-hoc percentage in the US is due to
the higher Risk-Free Rate necessitating a larger ad-hoc percentage to ensure EA’s Cost of Debt
surpasses it.
Ad-Hoc for Cost of Debt
Electronic Arts Sony Group
Ad-Hoc Percentage
2%
1%
Cost of Debt (pre Ad-Hoc)
2.98%
0.70%
Cost of Debt (post Ad-Hoc)
4.98%
1.70%
Nintendo
1%
0.02%
1.02%
Table 6 – Ad-Hoc adjusted Cost of debt
Risk of debt
The company’s balance sheet exhibited a notable shift, revealing a rise in debt from 2020 to 2021.
Various factors, including investment choices, operational outcomes, refinancing requirements, and
strategic goals, can impact changes in debt levels. The COVID-19 pandemic likely played a
substantial role, prompting companies to increase debt for short-term liquidity amid economic
uncertainties. However, it’s noteworthy that EA and Nintendo, in particular, have maintained a stable
debt proportion post-pandemic.
Figure 1 – Changes in debt (2019-2023)
Current Cost of Capital
To calculate the Current cost of Capital we will use the formula for WACC (Weighted Average Cost of
Capital):
= ( ∗ ) + ( + )(1 − )
Capital Structure
The first thing needed is to calculate the weight of equity and debt for each of the companies. We use
Market Value for equity, and Book Value for debt. Market value of equity is found by multiplying the
numbers of shares outstanding, as found in the company’s annual rep
