Google Valuation

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 000's.

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)

0.2%

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%)

12%

% 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)

=$8.36 billion x (1+2%) / (12%-2%) =$8.5272 / 10% = $ 85.272 B

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: P/E

Yahoo 17.51 Source: Yahoo! Finance for Google - Competitors