YTCSC9P

# YTCSC9P - • To realize a PV FCFE ≥ \$1.65 billion if...

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YouTube Case Study Question: Is YouTube likely to earn its cost of equity? Answer: Depends on the credibility of the assumptions underlying the forecast Test: NPV = PV FCFE – I ≥ 0, Implies PV FCFE must be ≥ \$1.65 billion (Purchase Price)

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YouTube Case Study: Estimating Base Year Cash Flow 1. (Revenue/Month) YouTube = (Revenue/Unique Visitor/Month) About.com x YouTube Unique Visitors/Month = \$.15 x 34 million = \$5.1 million 1. (Net Income/Month) YouTube = (Revenue/Month) YouTube x Google net profit margin = \$5.1 million x .25 = \$1.28 million 3. Assuming depreciation equal capital spending and Δworking capital zero, then base year free cash flow to equity (FCFE) is FCFE FullYear = (Net Income/Month) YouTube x 12 = \$1.28 million x 12 = \$15.4 million
Underlying Assumptions

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Unformatted text preview: • To realize a PV FCFE ≥ \$1.65 billion if discounted at 10%, we have to assume – Base year FCFE would have to grow at least 225 percent annually for the next 15 years – FCFE would grow at 5 percent annually during the terminal period Results: – PV TV = \$1,005 million – Total PV = \$1,610 million – PV 15yrs = \$ 605 million Sensitivity Analysis • Assuming a higher revenue per unique visitor figure would result in a lower projected rate of growth of free cash flow to equity • However, assuming YouTube’s cost of equity is the same as Google’s may be optimistic. A higher discount rate to reflect YouTube’s probable higher level of risk would offset assumed higher revenue per unique visitor figure....
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YTCSC9P - • To realize a PV FCFE ≥ \$1.65 billion if...

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