Question

1. How does Google view its social obligstions and manage its image in society?

2. What is Google's risk profile? Where is this risk coming from (market, firm, industry or currency)? How is the risk profile changing?

3. What return would you have earned investing in Google's stock? Would you be under or out performed the market? How much of the performance can be attributed to management?

4. How risky is Google's equity? What is the cost of equity?

5. How risky is Google's debt? What is the cost of debt?

6. What is Google's current cost of capital?

Answer 1

A) Google manages to consistently meet all three benchmarks to manage it's image in the society while constantly expanding its CSR initiatives. The three criteria the Reputation Institute looks for are:

• Governance-includes transparency, openness, and corporate ethics.
• Citizens-how a company supports good causes. Includes the positive influence Google has on society and its environmental sustainability work.
• Workplace-examines employee treatment and equal opportunity for advancement. Google offers an array of perks and incentives for all its employees.

B) Google risk profile is highand this risk coming from all market, firm, industry or currency. Google has been trying to diversify its business away from advertising, such as with its cloud business and smart speakers. Despite these efforts, ad revenues still account for 70% of the total revenue.

So why is this a big problem for Google stock One reason is that the ad business is subject to shifts in the economy. For the most part, whenever there is a recession, companies often first cut back on advertising — because it is easy to do.

But there is something else to consider. Google’s is facing much more competition for ad dollars as well. According to a recent report from eMarketer, the company will lose some of its market share this year.

Interestingly enough, the rivals that are putting pressure on Google are not just social platforms, like Snap Inc , Pinterest and Instagram from Facebook, Inc.

C)If we have bought one share of Google in 2004 at its initial public offering price of $85, then it would be two shares worth $1,575 today, taking into account Google's stock split. That's a stunning 1,752.94% change, or about 18.5x. we have out performed the market with such a huge returns, the performance has been attributed to the management as their good decision and management skills bring the company in a position where they have 75% of the internet search market and 85% of the mobile search market. Additionally, search on the internet continues to grow as it becomes a more integral part of peoples' daily lives on a global basis. A massive profit driver for the company, this is the main ingredient in making Google a safe investment

D) Every stock faces certain kinds of risk, albeit in different ways. In the short term, Google faces serious headline risks over anti-trust lawsuits, regulatory challenges and the continued failure of its Motorola acquisition. Shareholders begin to get cold feet when they read too many negative news stories

Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return)

10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily. The current risk-free rate is 0.63000000%.

Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. Alphabet(Google)'s beta is 1.05.

(Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. We requires market premium to be 6%.

Cost of Equity of Google= 0.63000000% + 1.05 * 6% = 6.93%

E) GOOGLE'S operating cash flow exceeded its debt obligations,which means GOOGLE'S generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company

As of Dec. 2019, Alphabet(Google)'s interest expense (positive number) was $100 Mil. Its total Book Value of Debt (D) is $9989.5 Mil. Cost of Debt = 100 / 9989.5 = 1.0011%

F) Alphabet(Google)'s weighted average cost of capital is 6.84%. Alphabet(Google)'s ROIC % is 36.69% (calculated using TTM income statement data). Alphabet(Google) generates higher returns on investment than it costs the company to raise the capital needed for that investment.