a) What is its nominal annual rate of return?
6. Firm Multiples Method
Look up the P/E ratio of Google on Yahoo! Finan
ce. Look up the EPS of Yahoo! Inc. Based on the
P/E ratio of Google, estimate the intrinsic value o
f Yahoo! Inc. Is the estimated intrinsic value very
far from the actual stock price? Why do you thin
k this is so?
On Sept. 20, 4:00 PM EDT
P/E ratio of Google = 26.13
EPS of Yahoo! Inc. = 3.63
Intrinsic value of Yahoo! Inc.
= P/E ratio of Google * EPS of Yahoo! Inc.
= 26.13 * 3.63
= $94.85
Actual stock price of Yahoo! Inc.
= $30.92
Estimated Intrinsic Value
The estimated intrinsic value ($94.85) is very far fr
om the actual stock price ($30.92).
Google’s P/E ratio is not a good estimate to be use
d to calculate Yahoo! Inc.’s intrinsic value of the st
ock price. The actual P/E ratio of Yahoo! is 8.51, w
hich is much lower than Google. We cannot comp
are Google with Yahoo! as Google is a much bigge
r company with many more subsidiaries (YouTube
etc.). Google has 67% of search engine market sha
res while Yahoo! only has 11.8%.
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