1. 1
Valuation of
Martynas Reingardtas
Capital Budgeting
Professor Hubert Joo
08-10-13, Barcelona
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2. Agenda
 YAHOO! Inc. – Overview
 Cash flow calculations & assumptions
 WACC calculations & assumptions
 NPV & other investment rules
 Comparison with market & expectations
 Conclusions & recommendations
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3. – Overview
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 Founded in 1994 by David Filo and Jerry Wang from
the campus of Stanford University
 Workforce of 11,700 people; offices in more than 30
countries, regions & territories
 Focusing on search, content & communication
tools
 Main competition is comprised of large, multi-
national web service and search engine companies
such as Google, AOL and MSN
 Revenues for Yahoo! Inc. are mainly from placing
advertisements, especially for large brands such as
Walmart, General Motors and Bank of America.

4. Cash flow calculations & assumptions
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Forecast 5Y
(in thounsands) 2013* 2014* 2015* 2016* 2017*
Revenue $ 5,011,499 $ 5,061,614 $ 5,137,538 $ 5,240,289 $ 5,345,095
sales growth % 0.5% 1% 1.5% 2% 2%
Total operating expenses $ 3,906,620 $ 3,945,686 $ 4,004,871 $ 4,084,969 $ 4,166,668
% of sales 78% 78% 78% 78% 78%
EBIT $ 1,104,879 $ 1,115,928 $ 1,132,667 $ 1,155,320 $ 1,178,426
Tax $ 386,708 $ 390,575 $ 396,433 $ 404,362 $ 412,449
NOPAT $ 718,171 $ 725,353 $ 736,233 $ 750,958 $ 765,977
Depreciation $ 368,004 $ 371,684 $ 377,259 $ 384,804 $ 392,500
Depreciation/Capex % 79% 79% 79% 79% 79%
Capex $ -464,511 $ -469,156 $ -476,194 $ -485,717 $ -495,432
Capex/Sales % 9% 9% 9% 9% 9%
∆ OWC $ 218,024 $ -1,455 $ -2,204 $ -2,982 $ -3,042
Free Cash Flow (FCF) $ 839,688 $ 626,426 $ 635,095 $ 647,063 $ 660,004
2013* 2014* 2015* 2016* 2017*
OWC $ 145,459 $ 146,914 $ 149,117 $ 152,100 $ 155,142
OWC/Sales % 3% 3% 3% 3% 3%

5. 5
WACC calculations & assumptions
Inputs for WACC Calculation:
Risk free rate (%) 1.55% source: Bloomberg
Cost of Debt (%) 2.05% source: Bloomberg, S&P, McKinsey
Equity risk premium (%) 5.62% source: A Damodaran
Beta of equity 1.17 source: A Damodaran
Corporate tax rate (%) 35%
Weighted Average Cost of Capital (WACC) Calculation
Debt Equity
Pre-tax cost of debt (%) 2.05%
After-tax cost of debt (%) 1.33%Cost of equity (%) 8.13%
Long-term liabilities $ 1,441,000,000
Market value of
equity $33,120,000,000
weight 4.17%weight 95.83%
WACC 7.84%
 Cost of debt: AA+/AAA credit rating is assumed,
and 0.5% spread is added to risk free rate.

6. NPV calculations
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Terminal Value (TV), Growing perpetuity
TV 2018 = FCF 2018/(w-g) = FCF 2017 (1+g)/(w-g)
Growth rate 2.0%
WAAC 7.84%
TV 2018 $ 11,523,174,249
NPV (2013-2017) $ 2,754,519,807
Yahoo Enterprise Value $ 10,654,553,709
Enterpise value is the value of assets excluding cash and other financial assets.
+ Cash and cash equivalents $ 2,667,778,000 2012
+ Short-term marketable debt securities $ 1,516,175,000 2012
These are
financial assests+ Long-term marketable debt securities $ 1,838,425,000 2012
+ Investments in equity interests $ 2,840,157,000 2012
Long-term liabilities $ -1,441,000,000 2012
Equity value = Enterprise value + Cash + Financial Assets - Long term liabilities (debt)
Equity Value $ 18,076,088,709

7. Simulation of Growth & WAAC
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Growth 2.0%
WAAC 10% 12% 13% 14%
TV 2018 $ 8,415,048,828 $ 6,732,039,062 $ 6,120,035,511 $ 5,610,032,552
NPV (2013-2017) $ 2,609,979,644 $ 2,486,876,634 $ 2,428,902,382 $ 2,373,152,500
Yahoo Enterprise
Value
$ 7,835,062,896 $ 6,306,816,391 $ 5,750,612,465 $ 5,286,827,614
Equity Value $ 15,256,597,896 $ 13,728,351,391 $ 13,172,147,465 $ 12,708,362,614
Growth 0% 1% 3% 4%
Yahoo Enterprise
Value $ 8,524,400,053 $ 9,433,813,373 $ 12,379,505,707 $ 15,002,361,826
Equity Value $ 15,945,935,053 $ 16,855,348,373 $ 19,801,040,707 $ 22,423,896,826
@WACC 7.84%

8. Does it make sense?
Comparing to the market
2008.11.21 2009.01.23 2010.08.27 2011.08.05 2012.08.31
price per
share
(lowest) $ 9.39 $ 11.32 $ 13.43 $ 11.74 $ 14.65
Market Cap. $ 13,066,748,400 $ 15,916,769,000 $ 17,577,667,480 $ 14,293,226,940 $ 16,338,163,450
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 NASDAQ real-time data (Sep 3rd
2013)
 Price per share 27.60$ !
 Market Cap. 33,12 B $ !!!
 Market expectations (comparing with our calculations)
1. Growth 5.75% !!!, @WACC 7.84%; or
2. WACC 4.4% !!!, @growth 2%

9. Conclusions & recommendations
 Current market expectation are overheated with
emotions and too optimistic or even unrealistic.
 We recommend to BID taking 2% growth (max)
and more conservative WAAC 10% (min)
 The first BID then could be ~15 B$
 Apple (they have huge amount of cash) might buy
Yahoo! Inc. Synergies with “Apple” are not
estimated.
 33 B$ is not realistic price. All premium will go to
shareholder of Yahoo!
 The deal could be closed at 18-20B $ (max).
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10. Thank You !