You are trying to value Zombie Games Inc,, a company that manufactures games for the major game systems. You have been provided the following information:
The firm generated $ 30 million as operating profit (EBIT) in the most recent year and the corporate tax rate is 40%.
The gross capital expenditures incurred in developing new games was $ 12 million in the most recent year and depreciation was$ 5 million.
The non-cash working capital increased by $ 4 million during the course of the last year
The cost of capital for the company is 10%
a. Assuming that the after-tax operating income, capital expenditures, depreciation and non-cash working capital all are expected to grow 15% a year for the next 3 years, estimate the free cash flows to the firm (FCFF) each year for the next three years.
b. After the year 3, the high growth period for the company ends and the after-tax operating income (e.g. NOPAT) will start to grow by 3% forever. You also anticipate that the company is going to re-invest 20% of its NOPAT each year. This investment includes both, capital investments and working capital investments. Estimate the terminal value of the firm and discount it to present day
c. If the firm has 100 million in debt, $20 million in liquid financial securities and 10 million shares outstanding, estimate the value per share today
d. Compute the EV/EBITDA measure and explain what it means. Note that the EV/EBITDA ratios for the major competitors of Zombie Games is 12.0.