Financial Analysis of Google

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GOOGLE

Financial Analysis Report

Prepared for:
Financial Management Class –
Florida Institute of Technology

February 2011

TABLE OF CONTENTS

EXECUTIVE SUMMARY3

COMPANY INTRODUCTION4

FINANCIAL ANALYSIS5

Summary Financial Analysis Report6

WEIGHTED AVERAGE COST OF CAPITAL (WACC)10

FUTURE CASH FLOWS12

ANALYSIS OF CASH FLOWS13

Sensitivity Analysis of Google’s 2011 Future Cash Flow14

Sensitivity Graph for Google’s 2011 Future Cash Flow15

Sensitivity Graph for Google’s 2011 Future Cash Flow15

Inflation Analysis15

Google Inc. Discounting Future Cash Flows for Inflation @ 1.7%:16
Footnotes effect on future cash flows17

Analysis of Google Competitors19

ANALYSIS OF CASH FLOWS20

Footnotes effect of future cash flows21

Analysis of Google Competitors23

Major Project “post audit”24

HISTORICAL STOCK PRICE26

SECURITY ANALYST’S REPORTS28

DIVIDEND and CAPITAL STRUCTURE29

CORPORATE GOVERNANCE30

MERGER and INTERNATIONAL STRATEGY32

EXECUTIVE SUMMARY

This report provides a detailed analysis of Google, an Internet search engine, which will offer information in order to make an informed decision as to whether to invest in Google. This report will also provide information regarding debt securities.

The financial report shows that Google is in a stability strategic focus. During the years of 2007 – 2009 their Gross Margin continued in an upward trend. The Net Profit Margin was stable and sales shows that Google is expanding their business. The financial condition ratios show an upward trend as well and the company’s debt ratio is within industry standards. Google does not carry any inventory and therefore remains above the industry’s standards in a Quick Ratio. Google’s financial leverage is also stable. Google has made key acquisitions and therefore, their Return on Equity has remained below the industry average. However, their Return on Equity has far exceeded their Return on Assets which denotes that Google has very good financial leverage. In essence, the company is more focused on increasing its working capital and paying down debts.

The Weighted Average Cost of Capital has remained low at Google and they reported zero debt in 2009. Google’s cost of preferred stock is also zero. By keeping the company’s Weighted Average Cost of capital low, the company created more value. However, in the future if Google decides to add more debt to their capital structure, even more value will be created as long as the cost of debt is lower than the cost of equity.

According to data obtained for an analysis of future cash flows, Google has made good investments and will continue to grow their cash flows while also continuing their edge as the leading Internet search engine. Google is rated as having very aggressive Accounting Governance Risk (“AGR”) which places them in the 5th percentile, higher than 95% of all companies. Therefore, even with an increase in inflation, Google stands strong in continuing their upward gain in their cash flows. Google controls the highest market share of any competitor at 64% within the search engine business genre. It has also built its capital structure on financial instruments such as cash, cash equivalents, marketable security and cash flow generated from its operations. Google offers Common Stock A, mostly purchased from outside investors and Common Stock B, preferable stock with 10 votes per share. At this time, Google’s founders own about 90% of outstanding Common Stock B. Google’s stock prices have steadily increased and the company has reinvested the profits back into the company for purposes of innovation and strengthening its employees. Google maintains an optimal capital structure without using large amounts of long-term debt to finance its capital expansion projects.

Google’s corporate governance limits most decisions...
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