Google Valuation
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Introduction
This report provides a company – level valuation of Google, Inc. which will include a discounted cash flow valuation, estimating the cost of capital, free cash flows and the present value of all future cash flows. Also being discussed and shown will be a relative valuation using the P/E metric as well as a comparison valuation using two to three firms.
Discounted Cash Flow Valuation
A) Cost of Capital
Cost of Capital = WACC
WACC=Cost of Debt x % Debt x (1-Tax Rate) + Cost of Equity x % Equity
WACC = 0% x 2% x (1-21% )+ 12% x 99.8%
WACC = 0% + 12.0%
WACC = 12.0%
The details for each of the inputs and how I arrived at them are listed below, all dollars are in 000s.
Cost of Debt
=Interest Expense / Total Debt
=Interest Expense / Long Term Debt + Current Portion of Long Term Debt
0 / ($2,986,000 + $1,218,000)
0 / (4204000) = 0
=0/(2986000+1218000) = 0.0%
% Debt
=Total Debt / (Total Debt + Equity)
=Total Debt / (Total Debt + Market Cap)
=$4,204,000 / ($4,204,000 + $1,847,100,000)
Tax Rate
=Income Tax Expense / Income Before Tax
=$2,589,000 / $12,326,000
21.0%
Cost of Equity
(From Module 5 Project Assignment, but shown here also.)
CAPM equation:
CAPM = risk-free rate + Beta x (Market Return – Risk – free rate)
= 1.9% + 1.18 x (8.6%)
% Equity
=1-% Debt
= 1 – .2% = 99.8%
B) Estimate of Free Cash Flows
There are a number of ways in which a person can calculate free cash flows. To make things simple I will use the current trailing twelve months cash flows as a proxy for the future cash flows.
Free Cash Flow = Levered Cash Flow (ttm)
Free Cash Flow (FCF) = 8.36 B Source: Key Statistics page of Yahoo! Finance for the
company.
C) Company Valuation using PV of Free Cash Flows
The formula that I will be using requires a growth rate in which I will use a modest constant growth rate of 2%.
Company Value = FCF x (1+growth rate) / (WACC – growth rate)
Relative Valuation
The overall logic behind doing a relative valuation is that we are able to estimate the market value or stock price of a company by referring to a similar company or even a group of companies as a guide. In my calculation that I show below, I will use the Price-to-Earings (P/E) ratio for two competitors of Google.
Comparison Companies:
Yahoo
17.51 Source: Yahoo! Finance for Google – Competitors