Corporate Bridge Training

DCF APPLICATIONS – GOOGLE INC

1.1 STEP 1: CALCULATE FREE CASH FLOWS

I. Reference Net Income from Income Statement

II. Add back non-cash expenses
Depreciation
Amortization
Stock-based compensation
III. Add back interest, as we are calculating the cash flows to the firm i.e. Debt-holders
as well as Equity-holders not just the Equity-holders.
IV. Substract the projected Capital Expenditure required, as that amount would not be
available to shareholders and would be used to fuel the growth of the company
V. Also include the changes in working capital
a. Substract the amount if there is an increase, as that additional amount would be
blocked in working capital
b. Add the amount if there is a decrease as compared to previous year, as that
amount is freed out of working capital cycle and is available to shareholders.

Add them all to arrive at Free cash flow available to firm (FCFF)

Interest Expense has not been projected

as Google has no long-term debt

1.2 STEP 2: CALCULATE WACC

1.2.1 APPLY CAPM TO CALCULATE THE COST OF EQUITY

Take risk-free rate and market premium as per the US Markets

Valuation Assumptions
Risk free rate (rf ) 2.5%
Market Premium 7.5%
Taken as per US markets
Cost of Equity

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1.2.2 TAKE A VALUE FOR BETA

Beta taken from Reuters

1.2.3 CALCULATE THE COST O F EQUITY

Apply CAPM Model to calculate

the cost of Equity

1.2.4 ESTIMATE THE COST OF DEBT

Valuation Assumptions
Terminal growth rate 3.0%
Cost of debt 6.0%

Beta 1.2
Risk free rate (rf ) 2.5% Cost of Debt assumed at 6%
Market Premium 7.5%

Cost of Equity 11.13%

WACC Calculation
Total Debt -
Shareholders' equity 56,976
Capitalization: 56,976
Debt: Equity -
Debt: Total Capital -
Equity: Total Capital 1.00

WACC 11.1%

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1.2.5 CALCULATE WEIGHED AVERAGE COST OF CAPITAL (WACC)

Take the weighted average summation of cost of debt and cost of equity to calculate WACC

No long-term debt on Google’s Balance

Sheet

Take the weighted average of the cost of

debt and cost of equity to calculate WACC

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1.3 STEP 3: ESTIMATE THE TERMINAL VALUE

Terminal Growth rate assumed at 3%

Terminal Value

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1.4 STEP 4: DISCOUNT FCFF

1.5 STEP 5: DISCOUNT THE TERMINAL VALUE TO PRESENT

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1.6 STEP 6: FIND THE ENTERPRISE VALUE.

Enterprise Value

1.7 STEP 7: ADJUST ENTERPRISE VALUE TO ARRIVE AT EQUITY VALUE

I. Substract: Debt
II. Substract: Minority interest
III. Add: Cash and cash equivalents

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1.8 STEP 8: FIND THE FAIR PRICE OF GOOGLE SHARE

Google’s fair Price as per

CB Research

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