Valuing Google IPO Share Price
Google Inc. of Mountain view, California, operates the most popular and power-full search engine
on the Web. The company went public using an unconventional Dutch auction method on August
19, 2004. The resulting IPO was the largest Internet IPO ever, raising $1.67 billion and leaving the
firm with 271,219,643 shares of common stock.
While Google commands a wide lead over its competition in the search engine market, it is
witnessing increased pressure from well-funded rival entities. Yahoo! Inc., with a market cap of
approximately $38.43 billion, is generally regarded as following a business model very similar to
Google’s.
a) Use the data found in Exhibit P8-12.1 for the following companies as comparables in your
analysis: Earthlink, Yahoo!, eBay, and Microsoft. Compute the IPO value of Google:
shares using each of the comparable firms separately, and then use an average “multiple”
of the comparables firms. Use the year-end 2003 balance sheets and income statements of
the comparable firms to do the analysis. Assume that Google’s forecasted values at the
time of the IPO are as follows: Net income is $400 million, EBITDA is approximately
$800 million, cash and equivalents are $430 million, and interest-bearing debt (total short-
term and long-term) equals only $10 million.
b) Which of the four comparable firms do you think is the best comparison firm for Google?
Why?
Exhibit P8-12.1
Financial Earthlink Yahoo! Ebay (EBAY) Microsoft
Information (ELINK) (YHOO) (MSFT)
2003 shares 159,399,000 655,602,000 646,819,000 10,800,000,000
outstanding
2003 fiscal close $10.00 $45.03 $64.61 $25.64
stock price
Market $1,593,990,000 $29,521,758,060 $41,790,975,590 $276,912,000,000
capitalization
Short term debt $900,000 $0 $2,800,000 $0
Long-term debt $0 $750,000,000 $124,500,000 $0
Cash and $349,740,000 $713,539,000 $1,381,513,000 $6,438,000,000
equivalents
Short-term $89,088,000 $595,975,000 $340,576,000 $42,610,000,000
investments
EBITDA $218,100,000 $455,300,000 $818,200,000 $14,656,000,000
Net income $(62,200,000) $237,900,000 $441,800,000 $9,993,000,000
Calculated EPS (0.39) 0.36 0.68 0.93
Valuing Residential Real Estate
Sarah Fluggel is considering the purchase of a home located at 2121 Tarter Circle in Frisco, Texas.
The Home has 3,000 square feet of heated and cooled living area, and the current owners are asking
a price of $375,000 for it.
a. Use the information provided in the following table to determine an initial estimate of the
value of the home Sarah is considering:
Comp 1 Comp 2
Sale price $240,000 $265,000
Square footage 2,240 2,145
Selling prices/sq ft. $107.14 $123.54
Time on the market 61 days 32 days
b. After making an initial estimate of the value of the home, Sarah decided to investigate
whether the owner’s asking price of $375,000 might be justified based on unique attributes
of the home. What types of details might you recommend Sarah look for in trying to justify
the price of the home?
c. What if the house Sarah is considering had an asking price of $315,000? What would you
recommend Sarah do then?
Valuing Equity Using the Price-Earnings Multiple
Garrett Simpson Investments is evaluating a firm (Garp, Inc.) for recommendation to its clients
and trying to evaluate the firm’s current stock price. The firm is about to offer its shares to the
public and had earnings last year of $2.50 a share, which the analysts believe is expected to grow
by 20% next year. Similar firms in the industry are currently selling for price-earnings ratios
ranging from ten to fifteen times current period earnings. However, these competitor firms are
already public entities and have relatively low growth expectations for their earnings. What is your
estimate of an appropriate price range for the shares of Grap?
