The company I pick from S&P 500 is Google Inc., which is a multinational corporation specializing in internet-related service and products. Google has been estimated to be a rapidly growing global technology leader focused on improving the way people connect with information, and its trading stock price is remained really high and still on the rise.
The expected sales are given by Capital IQ from year 2014 to year 2018, and their values are listed below in the table. By calculating the average growth rate of sales over next five years, which is 12.8%, and have it compared with the one from the previous three years, which is 25.8%, it can be concluded that the projected sales value ...view middle of the document...
4%, and 15.7% respectively. So, I use the average value, which is 18.7% as the anticipated tax rate for the future calculation because Google is a mature and stable company that its tax rate will not fluctuate significantly on an annually basis. In addition, the depreciation and capital expenditure given by Capital IQ are reasonable because they use the average margin from the previous three years values to predict future. The change in net working capital from year 2014 to 2018 are also reasonable and in a decreasing trend due to a decrease in income tax rate. By applying those values in the table, we can get the anticipated free cash flows over the next five years for Google (Appendix B). The results are very similar to what Capital IQ calculated so its validity can be verified.
Table3. Free Cash Flow
| 2014 | 2015 | 2016 | 2017 | 2018 |
FCFs | 18174 | 28792 | 32624 | 36432 | 40365 |
In order to get the long run growth rate of free cash flows, I calculated the constant decreasing rate from year 2015 to 2018, which is 1.3%. Then, I assume Google is not able to maintain the high growth rate in the long run perspective. Instead, the expected long term growth rate is calculated by assuming that the growth rate will continue to decrease for five more years at a 1.3% constant until reach 2%, if we see 12 year as a reasonable long run term (Appendix C). The equity beta found on Yahoo!Finance is 0.89, and market risk premium is found on Bloomberg. The risk free rate of 2.775% is given by Capital IQ which is referred to a yield of 10 year Treasury bond. It is reasonable to use the long term yield as a risk free rate in calculating cost of capital for Google who have long term and stable inventories. Using CAPM, we can get equity cost of capital, which is 2.775%+0.89*7.28%=9.254%. The cost of debt of 2.776% is calculated by deducting the tax margin from the pre-tax cost which is calculated based on risk free rate and credit spread (obtained from Moody’s KMV CreditEdge product) (Appendix C). With the cost of equity capital and effective cost of debt capital, we can calculated WACC using formula E*re/V+D*rd/V, which is 98.36%*9.254%+1.64*2.776%=9.15% (Appendix D). After getting long run growth rate and WACC, we can find the terminal value: Vn=40365*(1+2%)9.15%-2%=550,766
Then, the present value of free cash flows can be calculated based on the discount rate (Appendix B). According to Appendix E, the market value of equity is $484,185 million and the stock price is $1,183.04, while its intrinsic value of stock is $1,440.81.
I choose the mean of TEV/EBITDA and the median of TEV/Revenue as multiples to estimate Google’s stock price (Appendix F). By applying the mean value of TEV/EBITDA to find...