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FINANCIAL ANALYSIS OF YAHOO

Students will analyze and synthesize the financial reports of an organization of their choice and present their findings in a PowerPoint presentation (with completed Notes section providing details of analysis and synthesis of information to presented points. You must also provide a separate document of exhibits of financial reports analyzed for the Presentation).

Projects will include:

•Organization overview
•Financial statements analysis
•Analysis of cash flow
•Stock performance analysis
•Cost of capital or required return on investment
•Value of the organization: book value, common stock value
•Discussion of appropriate organizational development options with the inclusion of general risk and return scenarios from a management perspective

Solution Preview

Overview: Yahoo is a search engine and content provider. Their specialties include their finance page and there social news pieces. They have had a turbulent past which seems to have stabilized over the past 2 years. Approximately 4 years ago, Microsoft made an offer to purchase Yahoo with the intent of enhancing the firm as a subsidiary for the provisioning of content and to gain access to the search engine market space. At the time, Yahoo's stock was selling at about $17/share, and Microsoft doubled that to approximately $34-$35/share. The offer was rejected by the then CEO (one of the original founders of Yahoo), for being too low of an offer. Microsoft subsequently declined to offer more, and proceeded to establish their own search engine --- now known as BING.

In the interim, Yahoo went through several changes in leadership before finally hiring the current CEO, Marisa Meyers, who was in product development with Google. Since her installation, the firm has stabilized and grown both the product and service base as well as acquired a few companies, and seen the share prices double.

I'm attaching a brief history for your review and use if you wish to embellish this summary.

Financial Statement Analysis: Statement analysis consists of reviewing ratios which provide a relationship of comparative value both for the company (wherein we compare Yahoo to itself via past performance, and to the industry --- in this case Google, the acknowledged leader in this space). A summary of these results include:

Current Ratio measure solvency of the firm: Yahoo is 4.38 versus Google at 2.38. This says that Yahoo can pay its current obligations, and still have $3.38 left in current assets, which is a very robust and healthy cash situation.

Receivables measures the time it takes to collect outstanding money. Yahoo is at 57 days, while Google is at 17.7 days --- a decided disadvantage based on the notion that we need to gain cash as soon as possible in order to avoid a potential cash shortage for paying bills and to avoid interest costs if we need to borrow to accommodate needed cash. So this would definitely be an area of improvement for Yahoo to work on.

Inventory Turnover is unable to be projected due to the fact that Yahoo does not claim Inventory as an asset,

Debt to Assets measures the amount of debt versus the amount of assets the firm has. Yahoo is 15% versus Google at 23.5% --- a decided advantage for Yahoo representing lower debt means the potential to gain added funding through a debt offering in the future if necessary

Debt to Equity measures the amount of debt versus equity within the firm. Yahoo is at 17.5% versus Google at 30.8%. Again an advantageous position for Yahoo in terms of keeping cost down in the form of interest payments, and increasing financial flexibility for the potential for future funding requirements.

Net Profit Margin represent the Net Income the firm is reporting. Yahoo reports at 8.5% while Google reports 29% --- so Yahoo has some work to do here in terms of either increasing sales or further reducing expenses.

Return on Assets (ROA) measures net income in relation to total assets. Yahoo is 23.5% versus Google at 9%, meaning they are using their assets to great advantage to secure the highest level of profit.

Return on Equity measures net income in relation to the equity account on the balance sheet. Yahoo is 27.6% versus Google at 11.9%. Once again we see that Yahoo is maximizing its earning potential in relation to the value of the firm.

Price to Earnings (P/E) ratio provides a view of the price of the stock in relation to the earnings per share investors are receiving. Yahoo is $30.73 versus Google at $27.82. The 52 week low and high price of stock for Yahoo is $18.34 - $36.22. For Google the metrics are $658 - $1048. Essentially Yahoo has doubled in price over the past year, and Google has gained an increase of approximately 37% --- both are extremely fine returns, but clearly Yahoo is definitely in growth mode.

Again, I am enclosing the financial for both firms, as well as a summary of these ratios in an excel spread sheet for your review.

Cash Flow: From 2010 to 2011 the cash flow position of Yahoo declined by approximately 8%. Conversely, from 2011 to 2012 the cash flow position improved by approximately 300%. This includes the fact that Yahoo acquired a firm called Tumblr, and gained a stake in the on net store known as AliBaba. So their cash position is much improved and their ability to pay their bills has substantially improved.

Keep in mind that a firm holds cash for 3 main reasons:

1 - transactional - to pay its bills
2 - speculation - to have funds available to invest
3 - precaution - to provide for contingencies

Yahoo is in an excellent position to cover all 3 categories at this point.

A copy of their cash flow statement is also provided for you to compare and understand the progress made.

Stock Performance Analysis. As mentioned above, the 52 week hi and lo were $36.22 and $18.34. From this we can see that the stock has essentially doubled in price, and trading at $36.55 today means that the market perception is favorable for the value of the stock to continue growing. Yahoo pays no dividends, so the investor must rely on price growth for their returns.

Cost of Capital or Required Return on Investment. I looked at the required rate of return on the investment because the cost of capital requires that we make assumptions regarding opportunity cost, relative market returns, the beta of the Yahoo stock and the like. Return on Investment (ROI) is measured as follows:

Gain from investing - Cost to Invest / Cost to Invest. Yahoo's total investment for 2012 was $6.2 billion. The return for the same period was $3.9 billion. Using the formula above, we find that ROI is 36.3%, which is a very healthy return in the current economy, implying that the growth component for Yahoo is substantial, and that assets are being acquired and used to full potential within the firm for both the short and long term.

Again, this information is readily available on the financial statements which I am attaching.

Value of the firm: Book value is essentially the value associated with the Equity section of the balance sheet at any moment in time. That value at the end of 2012 was $14.56 billion. Another way to view book value is to determine the capitalized amount of value within the firm, which represents the debt plus the equity. Using this version, we have a book value of $17.1 billion.

Market value represents the value of the shares in relation to earnings, and that value at the end of 2012 was $46.9 billion; calculated as shares outstanding (1,283,917,670) x share price as of today (36.55) = $46,927,190,830.

Again, this information resides within the financials I am attaching.

Finally, what risks are faced by Yahoo, as well as developmental issues they face? First let's review potential for growth and for developing their asset potential:

Their growth strategy appears to revolve around enhancing their web site to specifically gain users. When this occurs, metrics can be provided to potential advertisers which allows for organic growth of the firm through increased advertising revenue. In addition, the from is in active acquisition mode, acquiring firms which can aid in enhancing the web site, such as Tumblr, AliBaba, and their licensing with Microsoft. (I am also enclosing a statement of risk and potential copied directly from their web site in which they provide an analysis of both risk and reward for paying attention to the technological benefits of improving and continuing to add more products and service to their site).

So the upside to their strategy is markedly huge ---they have a highly regard financial site, news site, and social interaction.

Their risks include competing with other larger and more financially powerful sites including Google and Bing. In addition, they compete with news agencies, financial and analytical agencies both network based and broadcast, as well as news agencies and newspapers throughout the country and abroad. Essentially, they mud continue to improve and enhance their site just to maintain (and hopefully increase ) their market position. And you will note in the document I am attaching, Yahoo has a license agreement with Microsoft which moves it into a high risk situation in the event it is terminated.

In summary, the financials of the firm are improving, the financial stability of the firm has increased greatly, the market competitiveness is also improving, and it is being reflected in increases in Sales (measured by higher advertising revenue generated through the enhanced version of the site, as well as by the current improvements, as well as the future project improvements).

Hopefully this answers the items above, and the evidence for these items is being attached in the form of:

* Yahoo history
* Yahoo and Google financials
* Yahoo Risk Statement

Thank you for using our service, and best wishes! (PS: I HAD TO COPY SOME OF THE INFO BELOW BECAUSE THERE WAS ONLY PROVISION FOR 3 ATTACHMENTS - HOPE THIS WORKS).

Copy of Yahoo Balance Sheet
Add to Portfolio
Balance Sheet Get Balance Sheet for:
View: Annual Data | Quarterly Data All numbers in thousands
Period Ending 30-Dec-12 29-Sep-12 29-Jun-12 30-Mar-12
Assets
Current Assets
Cash And Cash Equivalents 2,667,778 7,560,400 1,539,269 1,719,968
Short Term Investments 1,516,175 852,816 371,204 489,912
Net Receivables 1,008,448 953,671 1,040,893 941,590
Inventory - - - -
Other Current Assets 460,312 318,892 318,932 331,327
Total Current Assets 5,652,713 9,685,779 3,270,298 3,482,797
Long Term Investments 4,678,582 4,424,769 5,430,508 5,392,495
Property Plant and Equipment 1,685,845 1,671,234 1,663,665 1,726,858
Goodwill 3,826,749 3,910,245 3,887,360 3,910,932
Intangible Assets 153,973 173,918 196,729 226,202
Accumulated Amortization - - - -
Other Assets 1,105,391 548,182 209,669 223,956
Deferred Long Term Asset Charges - - - -
Total Assets 17,103,253 20,414,127 14,658,229 14,963,240
Liabilities
Current Liabilities
Accounts Payable 993,306 3,197,017 900,185 891,433
Short/Current Long Term Debt - - - -
Other Current Liabilities 296,926 309,265 176,960 178,924
Total Current Liabilities 1,290,232 3,506,282 1,077,145 1,070,357
Long Term Debt 124,587 127,531 130,149 132,551
Other Liabilities - - - -
Deferred Long Term Liability Charges 1,082,831 1,174,793 934,698 900,339
Minority Interest 45,403 44,018 43,240 41,415
Negative Goodwill - - - -
Total Liabilities 2,543,053 4,852,624 2,185,232 2,144,662
Stockholders' Equity
Misc Stocks Options Warrants - - - -
Redeemable Preferred Stock - - - -
Preferred Stock - - - -
Common Stock 1,187 1,257 1,253 1,247
Retained Earnings 5,792,459 6,105,506 2,945,269 2,718,638
Treasury Stock -1,368,043 -1,132,615 -942,244 -486,737
Capital Surplus 9,563,348 10,067,211 9,976,949 9,870,062
Other Stockholder Equity 571,249 520,144 491,770 715,368
Total Stockholder Equity 14,560,200 15,561,503 12,472,997 12,818,578
Net Tangible Assets 10,579,478 11,477,340 8,388,908 8,681,444

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Copy of Yahoo Cash Flow Statement
Cash Flow Get Cash Flow for:
View: Annual Data | Quarterly Data All numbers in thousands
Period Ending 30-Dec-12 30-Dec-11 30-Dec-10
Net Income 3,945,479 1,048,827 1,231,663
Operating Activities, Cash Flows Provided By or Used In
Depreciation 654,601 648,239 682,509
Adjustments To Net Income -5,733,724 -158,753 -310,467
Changes In Accounts Receivables 34,752 38,100 -31,419
Changes In Liabilities 733,686 -364,298 -176,878
Changes In Inventories - - -
Changes In Other Operating Activities 78,529 97,849 -168,183
Total Cash Flow From Operating Activities -281,554 1,323,806 1,240,190
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures -505,507 -593,294 -714,078
Investments 3,876,883 1,137,886 1,097,270
Other Cash flows from Investing Activities -9,332 -342,230 126,723
Total Cash Flows From Investing Activities 3,362,044 202,362 509,915
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid - - -
Sale Purchase of Stock -1,949,470 -1,462,515 -1,581,923
Net Borrowings - - -
Other Cash Flows from Financing Activities -65,831 -64,123 -50,844
Total Cash Flows From Financing Activities -1,979,457 -1,455,958 -1,501,706
Effect Of Exchange Rate Changes 4,355 -34,247 2,598
Change In Cash and Cash Equivalents 1,105,388 35,963 250,997

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Currency in USD.

Google Financials
Revenues 2010 2011 2012 Q1 Q2 Q3 Q4
Google Websites $19,444 $26,145 $31,211 $7,312 $7,542 $7,727 $8,640
Y/Y Growth Rate 24% 34% 19% 24% 21% 15% 18%
Q/Q Growth Rate ...

Solution Summary

This is a detailed analysis and progress report on Yahoo through 2012, with adjustments for continuing operation in 2013. It provides a road map in terms of the history of the firm, as well as a foundation for future performance. Assembling and checking the information to put into the final PowerPoint form is left for the student to increase their learning.

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