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Okay. Welcome back.

Â And, if you didn't take a break, welcome continuing.

Â Okay. So, let's try to think about this.

Â I'm asking you to figure out the cost of capital of the company before it does so.

Â So, what I will encourage you to do is to first think of the company.

Â You've realized it, and you have how much debt or equity?

Â You just have equity. Debt is equal to, zero.

Â And this is which business? Video business.

Â Okay? So, I'm asking you the following.

Â I'm asking you to figure out return on a asset, which is also called rated average

Â cost of capital. And by the way, I'm assuming something

Â that you need to know, which I'll do later today, later this week.

Â Is that I'm making an assumption that there are no major frictions.

Â This is nature. How would it operate?

Â The weighted average cost of capital here would be what?

Â Return on equity. Why is that?

Â Because there's no debt. So, debt goes out of the picture, weighted

Â average cost of capital which is return on assets is also equity return on equity.

Â Okay? Very straightforward.

Â Reminds me, reminds you and me [laugh] of what?

Â Remember orange, apple? Very similar.

Â So, what do I need? How do I figure this out?

Â Well, very simple. If you just, just for a second, let's,

Â let's just get a clean sheet of paper for us, and come back.

Â So, let's do this. Let's try to think through this a little

Â bit. What do we know?

Â We know that Beta equity of this business, I'll put V on top.

Â V is for video gaming. And if I make a mistake tell me, okay?

Â Let your hand come out and say, come on, do it right.

Â Is equal to 1.5. Just telling you that D is equal to zero

Â makes you what? Makes you very uplifted and say this is

Â also beta asset that you gave me. Is this clear?

Â This is just mental. You don't need to calculate.

Â And where did you get this number from? Finance Yahoo, or idly, do it yourself.

Â Or if you don't have the time, Morning Star.

Â Okay? So there's a, this, this is estimation

Â invovled. These are not just, you know, like prices,

Â which are based on trading. These are manipulation of data, so

Â careful. 1.5.

Â Okay? Okay.

Â What do I need to do now to get cost of capital?

Â Remember cost of capital is what? Return on asset.

Â But you know that will also be equal to return on equity.

Â How do you know this? Sorry, I'm being painful.

Â Debt is equal to zero. This will be equal to what?

Â Rf. I'm going to write plus.

Â I'm dropping the expected signs. Rm times beta equity.

Â Video game, video game, video game. Why didn't I put a V, why, why no V here?

Â Why no V here? Why?

Â Because the certain, these are the two [laugh] numbers that belong to whom?

Â The whole market place. It has nothing to do with video gaming

Â directly, right? So, okay.

Â Do we know this? And, how would you get it?

Â Open up Yahoo Finance. Look at the ten year Government bond, and

Â you see what? Remember I told you, the companies

Â forecasting, it's not forecasting really. What is it doing?

Â It's just opening up the newspaper and looking at this number.

Â However, here are some judgement [inaudible], and I said it is, it is

Â assumes five%. Again, that's based on their view of what

Â the data from the past is suggesting. And what is this?

Â You know already, 1.5. Can you do this in your head?

Â Should be very straight forward. You see, that's what I like about capital.

Â Capital will take a complicated thing like risk and made it so simple, like, so

Â that's why I think this equation is better than E equals MC squared.

Â Because EMC squared is more about physics and this is about life, you know, a little

Â bit complicated. This is twelve%.

Â I want you to think about this, both about the nature, how I went about it.

Â I, I looked, took a lot of intuition and put it all into one equation.

Â Don't ever forget that the intuition is far more important than math, maths is

Â very, say straight forward. How did I get twelve?

Â 4.5 plus five times 1.5. Five times 1.5 is 7.5 plus 4.5 is twelve%.

Â So if I, if I were to ask you, what is this rate of return?

Â What is this cost of capital? Remember, this is for rich business with

Â your business. Okay?

Â I'm going to, as I said, I'm going to take pauses painfully after every question.

Â But remember, I'm taking a pause you don't have to.

Â Whereas if you are trying to think through the problem and doing it on your own, feel

Â free to take a break. In fact, I would encourage you to do so.

Â See you soon.

Â