PEGAH ARDALAN FIN-516 WEEK 2 MINI CASE ASSIGNMENT

Mini Case: Google 1. What is the name of the company? What is the industry sector? Google Inc. is a multi-billion dollar company in the informational technology (IT) industry. Google Inc. is one of the leading computer search engines in the world and is continuing to grow as the front-runner in their industry. 2. What are the operating risks of the company? Within business, there will always be operational risks to consider. "Operating risk is the basic or fundamental potential for failure that is associated with the ongoing function of any type of business entity" (Tatum, 2003, para. 1). The operating risks for Google Inc. include: internal fraud, destruction of company property, and quality of goods. Internal fraud is common in almost all industries and the same is true for the IT industry. Google Inc. is no exception to this type of operating risk, especially because of how much Google Inc. is worth. Yahoo Finance displayed the net worth of Google Inc. after the second quarter of 2013 to be $55.80B (Yahoo Inc., 2013, Financial Highlights, para. 4). With profit so high, there is always a risk that employees could defraud the company for their own personal benefit. Another potential operating risk for Google Inc. is destruction of company property. Being in the IT industry, the equipment used can be very expensive. The amount of

equipment, both hardware and software, is quite vast and if employees are destructive of Google Inc. property, the cost to repair or replace such equipment could be an operational disaster. In addition, the Google Inc. campus as a whole is a very large financial aspect of the company and maintaining the ground is costly, therefore, if Google Inc. is able to avoid destruction of the grounds, they are able to avoid some operational risk. Lastly, the quality of goods produced from Google must meet industry standard. If Google Inc. falls below the industry standard, they become financially vulnerable. In a competitive industry, it is important for Google Inc.to maintain a level of excellence and strive to stay at the top of the IT industry. With technology still booming, it is necessary financially for Google Inc. to continue pleasing and serving the public to the best of their ability. If the public becomes discouraged or disappointed with Google Inc.'s products, there is potential risk in losing profit in the future. 3. What is the financial risk of the company (the debt to total capitalization ratio)? Ratio = Debt/Stockholders Equity The total debt for Google Inc. after the end of the first quarter of 2013 is $7.38B and the total stockholders equity is $75.47B (Yahoo Inc., 2013, Balance Sheet). Therefore, the Debt to Equity Ratio is: =$7.38B/$75.47B = 0.0977*100 = 9.77% 4. Does the company have any preferred stock? Google Inc. does not have any preferred stock according to the balance sheet (Yahoo Inc., 2013, Balance Sheet). The Stockholders Equity is a combination of common stock ($23.43B), retained earnings ($51.69B), and other stockholder equity ($3.7M) (Yahoo

Inc., 2013, Balance Sheet.) 5. What is the capital structure of the company?: Short term portion Long Term Debt, Long Term Debt, Preferred Stock (if any), and market value of common Stock issued and outstanding? Below is the liabilities section of the balance sheet for Google Inc. Looking at the balance sheet, Google has Short term/Current Long Term Debt of $2.15B, Long Term Debt of $2.99B, no preferred stock, and Common Stock of $23.43B (Yahoo Inc., 2013, Balance Sheet). Liabilities Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Minority Interest - - - Negative Goodwill - - - Total Liabilities Stockholders' Equity 21,219,000 22,083,000 21,702,000 21,330,000 2,057,000 1,972,000 1,561,000 1,606,000 2,150,000 882,000 13,252,000 2,989,000 2,921,000 2,549,000 895,000 14,337,000 2,988,000 2,786,000 3,218,000 905,000 14,434,000 2,988,000 2,719,000 3,218,000 767,000 14,028,000 2,987,000 2,709,000 10,220,000 10,893,000 10,311,000 10,043,000 March 2013 Dec. 2012 Dec. 2011 Dec. 2009

Misc Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock Retained Earnings Treasury Stock - - - Capital Surplus - - - Other Stockholder Equity Total Stockholder Equity Net Tangible Assets 356,000 75,473,000 57,554,000 538,000 71,715,000 53,705,000 368,000 68,028,000 49,789,000 84,000 64,721,000 46,739,000 23,429,000 51,688,000 22,835,000 48,342,000 22,204,000 45,456,000 21,357,000 43,280,000

(Yahoo Inc., 2013, Balance Sheet) 6. What is the company's current actual beta? Google Inc.'s actual beta is 1.15 (Yahoo Inc., 2013, Stock Price History). 7. What would Beta of this company be if it had no Long Term Debt in its capital structure? (Apply Hamada Formula.) bL = bU[1+(1-T)(wd/ws)] Google Inc. 's information as stated above is: beta = 1.15 wd = 9.77 rd = 100-9.77 = 90.23 bL = 1.15[1+(1-0.40)(9.77%/90.23%) = 1.22 bL = 1.22

8. What is the company's current Marginal Tax Rate? The current Marginal Tax Rate for Google Inc. is 35%. This marginal tax rate was determined by analyzing the net income of Google Inc. Because Google Inc.'s net worth is $55.80B, they exceed the $18.33M taxable income and therefore the percentage is 35% (Brigham & Ehrhardt, p. 71). 9. What is the Cost of Debt, before and after taxes? Before tax debt = $55.80*22.04% = $12.30B/(1-0.40) = $20.50 Before tax debt = $20.50B/$55.80B = 0.3674*100 = 36.74% After tax debt = rd = Rd(1-T) Rd = $7.38B/$55.80B = 0.1322*100 = 13.22% rd = 13.22%(1-0.40) = 0.2204*100 = 22.04% 10. What is the Cost of Preferred Stock (if any)? Google Inc. does not have Preferred Stock and therefore will not have a Cost of Preferred Stock. 11. What is the Cost of Equity? rs = Dividends per share/Current market value of stock As of Friday, July 19, 2013, the current market value of Google Inc. stock is $896.60 per share and the DPS is $228.01(Yahoo, 2013, Summary). rs = $228.01/$896.60 = 0.2543* 100 = 25.43% 12. What is the cash dividend yield on the Common Stock? Dividends = Net Income - Equity Financing Dividend Payout Ratio = Dividends/Net Income The Income Statement located at Yahoo Finance displays a Net Income of $3.35B and

the Debt is 13.22% Since Equity financing could not be found, the Payout Ratio is unknown. 13. What is the Weighted Average Cost of Capital of the company? WACC = wd(rd)(1-T) + ws(rs) WACC = 13.22%(22.04%)(1-0.40) + (25.43%)(41.99%) = 0.1244*100 = 12.44% 14. What is the Price Earnings Multiple of the company? The P/E ratio is 25.94 (Yahoo, 2013, Summary). 15. How has the company's stock been performing in the last 5 years? (Yahoo Inc., 2013, Charts) Within the past five years, the Google Inc. stock has risen significantly. It value has approximately tripled with steady increases throughout the five year span in spite of the decrease in the end of 2008. Even within the last year, Google Inc. has increased from ~$650.00 per share to ~$900.00 per share. Since the IT industry continues to grow, looking forward, Google Inc. stock will probably continue to increase in value. 16. How would you assess the overall risk structure of the company in terms of its Operating Risks and Financial Risk (Debt to Capitalization Ratio)? With the Debt to Equity Ratio being so low, the overall risk structure is low. Operating risks within every company will exist but looking at the statistics as a whole, it seems as though Google Inc. is successful in maintaining its current operational risks. Google Inc. is a profound and growing company and therefore, the operating risks will not be extremely crucial in the upcoming years. Financially, Google Inc. has a very low Debt to Equity Ratio (9.77%) and beta (1.15). With Google Inc.'s net worth at $55.80B, they have the ability to take on some additional debt if needed.

Adding debt may ultimately increase their net worth in the future and allow for even a grander expansion of Google as a whole. 17. Would you invest in this company? Why? Or Why not? I would invest in Google Inc. Over the last five years, the company has greatly increased its stock performance and I believe that as a company, it will continue to grow. The industry as a whole is still thriving and therefore, Google Inc. will probably continue to compete for the top ranking in informational search engines. If investing, I would closely monitor Google Inc.'s Debt to Equity Ratio to gauge if they are taking chances and using debt to their advantage to increase profit. I would also look at other costs and focus on the P/E Ratio to make sure I was earning the maximum profit possible since Google Inc. is an established company. Overall, the financial review of Google Inc. makes a clear statement that the company is financially sound and is thriving in the industry. Google Inc. is very prominent it the industry and I would be comfortable to invest in the company if I had the opportunity.

Bibliography: 1. Brigham, E. & Ehrhardt, M. Financial Management: Theory and Practice (13e.) 2011. Mason:OH. South-Western Cengage Learning. 2. Tatum, M. What is Operating Risk?. Retrieved from www.wisegeek.com/what-isoperating-risk.htm 3. Yahoo Inc. Google Inc. (GOOG). Retrieved from finance.yahoo.com/q/ks?s=GOOG