Problem 3: Valuing Google (10 points)

Google, Inc., of Mountain View, California, operates the most popular and powerful search engine on the Web. The company went public using an unconventional Dutch auction method on August 19, 2004. The resulting IPO was the largest Internet IPO ever, raising $1.67 billion and leaving the firm with 271,219,643 shares of common stock.? You are trying to value the shares in an effort to price the IPO. (Mentally transport yourself back to August-04.) While Google commands a wide lead over its competitors in the search engine market, it is witnessing an increased pressure from well-funded rival entities. Yahoo! Inc., with a market cap of approximately $29.5 billion, is generally regarded as following a business model very similar to Google’s.

Using both PE ratio and Enterprise Value to EBIDTA ratio, at what price should the stock be offered? Use the data in the following table for the set of comparable companies in your analysis. Assume Google’s forecasted EBIDTA is approximately $800 million, cash and equivalents are $430 million, and interest bearing debt (total short-term and long-term) equals $10 million. Also, Google’s net income is expected to be $260 million.