Using two years of GOOGLE monthly and dailydata( from 10/01/2014 to 09/30/2016) the following estimations were culculated using "R":

2-years of Daily data:

Coefficients:

Estimate Std. Error t value Pr(>|t|)

(Intercept) 0.0008169 0.0005919 1.380.168

GSPC.Return 1.0153628 0.0638821 15.89

Jensens Alpha= 1.98*(1-1.015)= -0.0297

According to the 2-year daily data GOOGLE did worst than expected

R2: 0.3439

(1-R2) The firm-specific risk is 0.656, which can be diversified away and which is not rewarded.

3-years of Monthly data:

Coefficients:

Estimate Std. Error t value Pr(>|t|)

(Intercept) 0.007579 0.009411 0.805 0.42637

GSPC.Return 0.883609 0.306272 2.885 0.00685 **

Jensens Alpha= 2.12*(1-0.88)=0.25

According to 3 years of monthly data, stock did better than expected.

R2: 0.2014

(1-R2) The firm-specific risk is (1-R2) = 0.7986 which can be diversified away and which is not rewarded.

III- Cost of Capital

Estimate the market and book values of equity of equity and debt. Remember to capitalize the value of operating leases and add them onto both the book value and the market value of debt.

Estimate the weights for equity and debt based upon market and book values.

Using the bottom-up unlevered beta that you computed for your firm, and the values of debt and equity you have estimated for your firm, estimate a bottom-up levered beta and cost of equity for your firm.

Estimate an interest coverage ratio, a synthetic rating for your firm, a pre-tax cost of debt for your firm, an after-tax cost of debt for your firm.

Based upon the costs of equity and debt that you have estimated, and the weights for each, estimate the cost of capital for your firm.

How different would your cost of capital have been, if you used book value weights?

IV. Assessing Investment Quality

• For the most recent period for which you have data, compute the after-tax return on capital earned by your firm, where after-tax return on capital is computed to be

After-tax ROC = EBIT (1 tax rate)/(BV of debt + BV of EquityCash)previous year

• For the most recent period for which you have data, compute the return spread earned by your firm:

Return Spread = After-tax ROC Cost of Capital

• For the most recent period, compute the EVA earned by your firm

EVA = Return Spread((BV of debt + BV of Equity-Cash)previous year

V. Valuation

• Estimate FCFFs for the last three years and describe the dynamics.

• Based on the FCFFs in the last three years, choose the level and a stable growth rate of the FCFF. Ascertain that the FCFFs are representative and the company is not undertaking significant investment projects.

In choosing the growth rate consider growth rate of inflation, GDP or industry.

• Calculate the value of the company as a perpetuity using the results above.

• Consider two additional estimates of value for pessimistic and optimistic scenarios of growth

GOOGLE Content of Analysis I. According to the diagram of stakeholders (slide 4 of Lecture \"Objective in Corporate Finance\"), discuss how the firm interact with its stakeholders and potential conflict of interest (up to one page). In particular, Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders? What are the other potential conflicts of interest that you see in this firm? How does this firm interact with financial markets? How do markets get information on the firm? How does this firm view its social obligations and manage its image in society? Google's management and ownership are not quite separated from each other. The founders: Larry Page and Sergey Brin are, respectively, the CEO and president of Alphabet which is the renamed company that now \"owns\" Google. Google, along with other Silicon Valley major corporates, do not give the shareholders the right in decision making or voting in the company annual meeting if they are not major shareholders which breaks the rule that a one share is a one vote. Google philanthropy work started in 2007, the earliest date on their website. The work to which google is committed, listed there, is mostly located in the third world countries like Nibal, India, Vietnam ect., and is mostly about literacy and poverty. However, Google did not stop there but participated in earthquake reliefs and is in partnerships with some organizations. The latest philanthropy listed on their website goes back to 2011. II. Using daily and monthly historical data on company stock prices, estimate beta of the company (up to three pages). Estimate beta based on daily data for two consecutive years separately and comment the results. Estimate beta based on monthly data using at least three years of observations. For each regression comment the values of beta, alpha, R2 and the significance of the coefficients. Discuss how well did your stock do, relative to the market, during the period of the regression. Estimate and comment on Jensen's Alpha. Estimate what proportion of the risk in your stock is attributable to the market and what proportion is firm-specific. Estimate the range on the beta estimate with 67% and 95% probability. Compare the results of your estimation with beta reported on Yahoo Finance or Google Finance. Estimate Fama-French three-factor model and discuss the results 2-years of Daily data: Coefficients: Estimate Std. Error t value Pr(>|t|) (Intercept) 0.0008169 0.0005919 1.38 0.168 GSPC.Return 1.0153628 0.0638821 15.89 |t|) (Intercept) 0.007579 0.009411 0.805 0.42637 GSPC.Return 0.883609 0.306272 2.885 0.00685 ** Jensen's Alpha= 2.12*(1-0.88)=0.25 According to 3 years of monthly data, stock did better than expected. R2: 0.2014 (1-R2) The firm-specific risk is (1-R2) = 0.7986 which can be diversified away and which is not rewarded. III- Cost of Capital Estimate the market and book values of equity of equity and debt. Remember to capitalize the value of operating leases and add them onto both the book value and the market value of debt. Estimate the weights for equity and debt based upon market and book values. Using the bottom-up unlevered beta that you computed for your firm, and the values of debt and equity you have estimated for your firm, estimate a bottom-up levered beta and cost of equity for your firm. Estimate an interest coverage ratio, a synthetic rating for your firm, a pre-tax cost of debt for your firm, an after-tax cost of debt for your firm. Based upon the costs of equity and debt that you have estimated, and the weights for each, estimate the cost of capital for your firm. How different would your cost of capital have been, if you used book value weights? IV. Assessing Investment Quality For the most recent period for which you have data, compute the after-tax return on capital earned by your firm, where after-tax return on capital is computed to be After-tax ROC = EBIT (1 tax rate)/(BV of debt + BV of Equity-Cash)previous year For the most recent period for which you have data, compute the return spread earned by your firm: Return Spread = After-tax ROC Cost of Capital For the most recent period, compute the EVA earned by your firm EVA = Return Spread((BV of debt + BV of Equity-Cash)previous year V. Valuation Estimate FCFF's for the last three years and describe the dynamics. Based on the FCFF's in the last three years, choose the level and a stable growth rate of the FCFF. - Ascertain that the FCFF's are \"representative\" and the company is not undertaking significant investment projects. - In choosing the growth rate consider growth rate of inflation, GDP or industry. Calculate the value of the company as a perpetuity using the results above. Consider two additional estimates of value for pessimistic and optimistic scenarios of growth