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Module 6: Estimating the Cost of Capital Catalog & Mail order houses industry Matt Lynch

Module 6: Estimating the Cost of Capital Catalog & Mail order houses industry Matt Lynch. Presentation Outline. Brief Overview of Company & Industry Cost of Equity Capital Cost of Debt Capital Weighted Average Cost of Capital Valuing eBay. Industry Definition.

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Module 6: Estimating the Cost of Capital Catalog & Mail order houses industry Matt Lynch

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  1. Module 6: Estimating the Cost of Capital Catalog & Mail order houses industry Matt Lynch

  2. Presentation Outline Brief Overview of Company & Industry Cost of Equity Capital Cost of Debt Capital Weighted Average Cost of Capital Valuing eBay

  3. Industry Definition Comprised of companies that sell products through “non-store” channels, including catalogs, online sales, television, and radio Products and services are delivered through the mail Companies in this industry typically have low amounts of inventory and commonly act as the “middle-man” in sales transactions Source: business.highbeam.com

  4. eBay • Transaction based business model • Marketplace • eBay.com • StubHub.com and other small websites • Payments • PayPal • Bill Me Later • Marketing, Classifieds, Advertising Services • eBay Enterprises

  5. Three Different Costs of Capital • Cost of Equity Capital • Cost of Debt Capital • Cost of Enterprise Capital • Combination of risk of being : • Online Market Place • Payment Provider • Online Support Services

  6. Cost of Equity Capital • Capital Asset Pricing Model (CAPM) • Since we do not have rrf • Run regressions using the above formula (60 wks)…

  7. 60 Months Ending December 2013 Source: Yahoo!Finance

  8. Alpha = 0.0107 Beta = 1.25

  9. Alpha = 0.0107 Beta = 1.25 Range: 0.85 to 1.65

  10. Beta Estimates • http://www.google.com 1.25 • http://www.nasdaq.com 0.90 • http://investing.money.msn.com1.21 • http://www.reuters.com 1.24 • http://finance.yahoo.com0.71 • http://research.scottrade.com 1.2 • http://www.nyse.com 1.24 • http://research.tdameritrade.com1.20 • http://www.firstrade.com 0.91 • https://www.etrade.wallst.com 1.2 • http://finance.comcast.net 1.24 • http://www.zacks.com 1.25 • http://www3.valueline.com1.1 • Bloomberg 1.01

  11. Cost of Equity Capital Estimate of Beta used = 1.1 Estimate of Risk Free Rate = 3.69% Estimate of Market Premium = 5% Source: treasury.gov

  12. Cost of Debt Capital • rD = Pretax borrowing rate for debt X (1 – Tax rate) • Pretax borrowing rate proxied by: • Interest Expense / Average Amount of interest–bearing debt • Financial Expense Before Tax / Net Financial Liabilities • Interest Income and Net Financial Assets for eBay

  13. Cost of Enterprise Capital • For eBay: • VD = ($9,552) million (book value of NFA) • VEq = $71,002 million • (stock price of $54.87 at 12/31/13 times 1,294,000,000 common shares outstanding) • Implied VEnt= $61,450 million (($9,552) + $71,002 million )

  14. Cost of Enterprise Capital

  15. Valuing eBay Estimate of enterprise cost of capital: 10.1% Estimated growth rate beyond 2018: 7.0%

  16. Discounted Cash Flow Model

  17. Questions?

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