Introduction
This papers main objective is to analyze the on line travel
company Expedia taking into consideration factors such as its
financial standings, present and future strategies, industry
standards and competitor and finally, an intricate economic
examination. With the tools we learned in our MAcc Financial
Statement Analysis, we were able to break down the companys
available financial and contextual information, such as its
history, Porter Five, current and future strategy and financial
statement numbers, in order to build a more clear and concise
picture of Expedias current business position.
Introduction and Brief History
Expedia, owned by Expedia INC, is one of the worlds leading
online travel companies. Starting in Redmond, Washington, the
company headquarters are now in Bellevue. In 2012, Rich Barton, the
founder and CEO, stated on the company website that, in 15 years
one company literally has changed the travel industry forever and
has become the most important player in it.In its 18 years of
existence, Expedia, INC has changed its structure by being acquired
and subsequently acquiring other companies, and has become the
largest travel agency in the world. Beginning a brief history,
Expedia was first launched in October of 1996, debuting on the web
as Microsoft Expedia Travel Services. In November 1999, Expedia
announced their IPO and by January 2001 saw their first profitable
quarter. A huge milestone for Expedia in Q4 of 2001 was when the
company surpassed Travelocity as the #1 Online Travel Company. IAC
(an ecommerce giant) acquired Hotels.com in June 2003, Expedia in
August 2003, Hotwire in November 2003, and in March 2004 IAC
acquired Egencia and rebranded it as Expedia Corporate Travel. In
January 2005, Expedia took a controlling stake in eLong, a
China-focused travel agency. And in August 2005, IAC merged its
online travel businesses into Expedia, INC. Expedia, INC reached
yet another milestone in 2007, when it was added to the S&P
500.Today, the Expedia, INC website offers information on the 12
different companies that they own. These companies are: Expedia,
Expedia Affiliate Network, Hotels.com, Egencia, Hotwire, eLong,
trivago, Venere, CarRentals.com, Classic Vacations, Expedia
CruiseShip Centers, and Expedia Local Experts. With a mission of,
Revolutionizing Travel through the Power of Technology the Expedia
website blatantly declares statements such as We Love Travel and
Were Everywhere. Expedia hopes to help provide travelers with an
easy travel planning experience. The company hopes to, provide
personalized service, the latest technology and the widest
selection of vacation packages, flights, hotels, and rental cars.
Expedia also states that they help everyone, everywhere, plan and
purchase everything in travel Industry Economic Characteristics and
Competitive Dynamics
Expedia is part of the very competitive online travel industry
within the more broad lodging industry. The industry seems to grow
as fast as the internet itself does. Back in 1999, the Travel
Industry Association of America reported that 15.1 million
consumers booked their travel online.2 10 years later that number
had jumped to 70 million. Consumers are transitioning from using
the traditional travel agent to booking online. The online travel
industry is causing traditional travel agencies to modify and
update their business models to compete and stay relevant.
According to a Forbes article, Competitive Landscape Of The U.S.
Online Travel Market Is Transforming, Expedia, Priceline, Orbitz
Worldwide and Travelocity own 95% of the U.S. online travel market
(as of April 2014). While Expedia dominates the U.S. with about 40%
of the market share, Priceline has 35% in Europe. A benefit to the
internet is being able to easily penetrate worldwide markets.3
While domestic U.S. travel bookings could satisfy the market, if
another company is able to meet more demand for global travel and
create more business, the industry leader could shift. The leaders
and laggards will depend on whether youre examining the online
travel industry on a national or international level. And even
then, if a company is able to surpass the competition financially
despite only reaching a national level, they will control the
industry.Dynamic pricing is a popular pricing strategy and
competitive dynamic within the travel, lodging and hospitality
industries. Specifically pertaining to the online travel industry
is the dynamic pricing of airline industries. Airlines will often
change prices based on the day, time of day, and number of days
before the flight. Different factors such as number of remaining
seats, departure time, and number of cancellations will also affect
the dynamic pricing. Online travel agencies bank on being able to
provide consumers with the lowest prices for travel. So, they have
to work in accordance with the airline prices.4
Porters 5
1. Competition in the industry
The online travel industry is highly competitive. The graph
below depicts the direct competitors of Expedia within the
industry. These competitors are Orbitz Worldwide Inc, The Priceline
Group Inc, and Travelocity.com LP. While Travelocity.com LP is a
big competitor, they are a privately held company thus their
industry data is unavailable in this table. According to this data,
Priceline leads the group with 8.14 billion in revenues and 2.35
billion in Net Income. Priceline also has the highest earnings per
share at 44.27
.Table and data from:
http://finance.yahoo.com/q/in?s=EXPE+Industry. As of November 26th,
2014.
The online travel industry is in the mature stage, and is thus
highly competitive. Existing firms compete for market share and
acquire other companies to keep their relevance. There are low
switching costs for consumers, so theres a bigger struggle for the
companies to keep their customers. A new technological innovation
could push a company farther ahead of the other competitors. Just
as the traditional travel industry does, the online travel agency
has to stay flexible to changes in the external environment.
Innovation is important to sustain competitiveness. Any
first-movers who are able to create the next big thing will
instantly reap the benefits. They will be able to earn
above-average returns until the competitors are able to catch up
and respond. Second movers in this industry in specific would
benefit in seeing how consumers respond to and use new technology.
Second movers benefit in being able to wait and watch. They gain
time for research and development to create a more superior product
in response. The online travel agency has only been in existence
for approximately 20 years. So to be able to develop in such a
short amount of time, competitors would have had to develop and
respond to innovations in technology (and thus the industry).
2. Potential of new entrants into industry
Based on the heavy reliance of technological power and support,
it would be very difficult for a newcomer to enter this industry. A
new entrant would need significant capital and either the
technological know-how, or even more capital to pay someone with
the technological know-how to compete with the industry giants like
Expedia and Priceline. On top of that, Expedia is a huge company
with revenues of $4.7 billion in 2013 with 14,570 full-time and
part-time employees. (Expedia 10-K 2013) 1 These barriers to entry
especially involving economies of scale will prevent any small
start-up companies from entering if their technology isnt as
advanced as the companies already in the industry.Expedia has been
an innovator since inception. The company gained a head start by
being created through Microsoft. More recently, Expedia features a
service called TravelAds , a sponsored search product for hotel
advertisers.7 In 2011, Expedia expanded travel ads to Europe. The
product was described as easy to use, flexible and a high
return-on-investment to Expedia hotel partners worldwide. A new
entrant would have to create a relationship with hotels and
airlines to even be considered a competitor and this would be
extremely difficult to do when just starting out.If a new entrant
could offer lower prices on travel and other online services, they
may be able to compete. The basis of this industry involves the
best deals on travel and easy to use online services. The new
companys product would have to feature a superior website that is
quick and easy to use for consumers. For Expedia to continue to see
success, consumers have to return to their site and buy their
services while new consumers join. Another barrier to entry a new
entrant would face involves patents. Priceline filed a lawsuit
against Expedia in 1999 regarding patent infringement related to
technology for connecting an anonymous seller to a block of
potential buyers. 5 As far as patented technology goes, a new
entrant would have to make sure their processes arent infringing
any already used. In essence, Expedia and the already existing
companies in the industry have a leg up on any new entrants due to
intangible resources such as information, reputation and knowledge
that the newcomers wouldnt have access to.
3. Power of suppliers
The online travel industry relies on the suppliers services. For
example, Expedia provides hotels, cars, flights, cruises and
vacation packages. All of those products and services depend on the
actual hotels, car rental agencies, airlines, cruise agencies that
actually provide the services. Expedia and the other online travel
agencies act as the middleman between the ultimate buyer and the
hotel or car (etc.) service. With that said, the suppliers do have
a large amount of power over online travel agencies success. But,
there is a balance between the buyer and supplier relationship.
Expedia and other online travel agencies can only work if their
supplier has services and products the middleman can sell at
cheaper rates. For example, if a hotel has un-booked rooms or
periods of time with slower occupancy, the hotel can sell those
rooms to Expedia at a lower rate. Expedia will then resell that
hotel room on their website at a retail-based cost by adding more
to the cost they paid to create a profit. So, the hotels need
Expedia to book those unsold rooms, but Expedia ultimately needs
those hotels to make any sort of profit. To further demonstrate the
idea that although suppliers have the power, they do still need
Expedia, is the fact that Expedia is the one bringing customers to
the hotels or car (etc.) services. If hotels have un-booked rooms,
they obviously arent reaching their target market. The beauty of
the online travel agency industry is the ability to reach billions
of potential consumers through the web that the hotel or car (etc.)
services wouldnt have been able to reach on their own. Consumers
traveling through Washington from Oregon may not know which hotel
in the area to stay in. So, they use Expedia to try and find a
hotel. That Washington hotel may not have had the original
resources to reach consumers a state away in Oregon thus Expedia
helped them reach a bigger market.Hotels are a competitive industry
within themselves. There are large quantities of different types,
sizes, and qualities of hotels. There are low switching costs for
the consumer to book one hotel over another. While some hotels aim
for low-cost models such as Motel 6s who aim to offer cheaper yet
quality services (even though the quality is debatable in
comparison to others). In contrast, high-end hotels like the Plaza
in New York City offers a luxury experience that only few can
afford. Despite what hotel experience the consumer is looking for,
they will find many different options. Substitutes and switching
costs can easily hinder a hotels performance, so sometimes they
need the help of a middleman like Expedia to help them. The
supplier would just need to outweigh the costs/benefits of using a
middleman and losing profit on the room in that sense, versus
potentially not selling the room at all.
4. Power of Buyers
The entire platform of the online travel agency industry is
about providing the traveler with the best deal on whatever travel
service they hope to purchase. Buyers have high power in this
industry due to the fact that if the buyer doesnt buy the service,
there is no profit. Then, the middleman purchased a room or car
(etc.) from the ultimate service and was unable to resell it. The
buyers make the industry competitive. Competitors try to price cut
their products to beat out other companies offering similar
things.The target market in relation to the number of total
consumers in the world is small. Companies can only offer services
and goods to someone traveling and in need of the service. The
average consumer with no need for travel has no use for the
service. That concept alone increases buyer power. In addition,
switching costs for buyers are low. Its very easy for a consumer to
compare prices of Expedia and Priceline and then just choose
whichever is lowest. There is no sanction for deviating from a
company youve previously purchased from, there is no loyalty.
Beyond that, consumers dont even need to use the middleman they can
go directly to the hotel and book a room directly from the source.
That cuts Expedia directly out of the entire equation.Online travel
agencies just hope that consumers choose to use their company and
not go straight to the source. The industry relies on offering
lower prices or better deals than their competitors and the source.
But ultimately, the online travel agent middleman isnt necessary to
get the buyer to the ultimate supplier of the service which Expedia
has to overcome.
5. Threat of substitute products
The threat of substitutes essentially combines all of the four
previous Porter forces into one culminating force.As discussed with
buyer power, ultimately, the online travel agent middleman isnt
necessary to get the buyer to the ultimate supplier of the service.
The online travel agency industry is almost like a branch off
numerous other industries such as the hotel industry and the
lodging industry. Consumers can literally bypass the online travel
industry and go straight to the other industries.There are low
switching costs for consumers, so its easy for them to switch to a
competitor with similar services. Also, the substitute product
offers very similar services with equal or superior quality
sometimes even at a cheaper cost. This makes the threat of
substitutes even higher in an industry based on offering the
cheapest service/good. Expedia in particular would have to focus on
offering higher quality services at cheaper costs to keep consumers
from switching.
Expedias Current Strategy Nature of Service and Overall
Strategy
Expedia, Inc. is an online travel services company that offers
individuals and businesses the opportunity to book their travel and
compare prices for entire vacations packages on line. Currently,
Expedia employs an online shopping mall and merchant strategy
(Chen, Lee, & Barnes 104). This strategys goal is to put the
consumer in charge of comparing prices so they can satisfy all of
their travel needs, including airfare, hotel, car rental, and
excursions, in one place by booking their entire vacation on line.
In this way, not only do customers enjoy ease and convenience of an
on line service, but they are also able to view reviews and ratings
of various travel and tourism enterprises when making decisions, or
in other words, they can get instant feedback.Expedia operates in a
very competitive marketplace with competition from similar services
such as Travelocity and Orbitz, ticket discounters such as
Priceline.com and Lastminute.com, traditional travel agencies, and,
increasingly, air- lines and hotels themselves. Expedia harnesses
the power of Web services to distinguish itself in this market.The
companys competitive strategy is driven by nearly every travelers
need to receive up-to-the-second, diverse information at any time
and any place. Expedia actively supplies travelers with real-time
personalized information, such as flight status. In order to
compete, the company used the push and pull strategy: information
is pushed to travelers (sent to them from Expedia) as well as
pulled from the companys portal (accessed by the travelers through
specific inquiries). This multichannel provision of timely travel
information is the key for attracting new customers and for keeping
existing customers. To make this happen Expedia needs to connect to
many service providers (airlines, hotels, car rental companies) as
well as airports, news services, map services, and more. Expedia
earns profits through mark-ups, as the company purchases seats on
airplanes or hotel rooms in bulk and then sells them to customers
at a premium (McCartney). Also according to McCartney, currently,
selling hotel rooms has been a more lucrative business for Expedia,
for the company can negotiate special deals with hotels and
sometimes even buy up inventory from hotels that they resell at
whatever price they can get. For this reason, customers that
purchase a hotel room together with their airline ticket or car
rental are more valuable to Expedia. In addition, the company
brings in additional revenue from advertising. Integration within
value chain For Expedia, the value chain integration in services
comes in the form of low prices, convenience, and access to special
time-sensitive deals and travel packages. Through this model, the
company is able to provide diversified travel services as well as
bargain prices, mostly to attract individual travelers. These
services are penetrating to the corporate travel area, which has
historically been the domain of travel agents business.Much of the
Expedias success is due to the expanse of its operations, and the
competitive advantage due to its many subsidiaries strategic
partnerships. Such attributes give the company the ability to
negotiate, offer lower prices to its customers, and reach various
market segments. Because Expedia was an early entrant to the online
travel services market, it has solidified its position and gained
valuable expertise. The key to manage all these tiers of service is
information. Expedia manages information to make these value chains
more efficient and create value for their customers, and it uses
information networks provided by third-party information technology
integrators to coordinate their value chains.Expedia can create
complete packages from the different options. Local or
Internet-based travel agencies help customers to select the package
that is right for them. Moreover, consumers are searching the globe
for new travel experiences and destinations. The Internet enables
even the most remote holiday destinations to be presented to an
international clientele. Expedia markets their services alone or
teams up with partners across the world to reach a bigger audience,
and, consequently, more customers. Examples of the companys key
partners are international hotel chains such as Hilton and
Sheraton, and local tour operators. Geographical and Industry
diversification Not only is Expedia based and present in the United
States, they also have a very strong presence in United Kingdom,
Canada, Germany, and many other countries. It offers travel
products and services via its supply portfolio which includes more
than 260,000 hotels in 200 countries, 400 airlines, packages,
rental cars, cruises, as well as destination services and
activities. The online travel giant said approximately 60 million
unique visitors visit its sites on a monthly basis and through
December 31, 2013, there were over 90 million global downloads of
its mobile applications across its numerous brands.Brand Expedia
also has a joint venture with low-cost airline AirAsia (AIABF) in
Asia Pacific that allows Expedia sites to be the only official
third party online distribution channel for AirAsia content. As
part of an exclusive, long-term strategic marketing agreement with
Travelocity signed during the third quarter of 2013, Brand Expedia
launched hotel and air products on the Travelocity-branded websites
for the U.S. and expects to complete the majority of the migration
of the remaining products and the Canada website during the first
half of 2014.It used to be that sites like Orbitz, Travelocity, and
Expedia charged customers anywhere between $6.99-$11.99 per airline
ticket booked because they were providing a service; however, in
March 2009, Expedia got rid of booking fees on airline tickets
amidst the tough competition of the online travel services market
(McCartney). The others soon followed. This is just a small example
of how much the industry as a whole has had to differentiate and
evolve in order to stay competitive and up to date with new
technologies.
Financial Statement Quality Assessment
Note: The results of the following adjustment are shown on the
adjusted financial statement in the Appendix:
The appropriate adjustments are essential for financial
statement analysis before analysis of profitability and risk and
forecasting financial statement. Meanwhile, the adjustments also
increase the comparability of the financial statement of similar
firms in the same industry. Therefore, we made two necessary
adjustments to financial statement of Expedia, the company our
group has chosen to analyze. The adjustments include capitalizing
operating leases and converting property and equipment from
straight line to accelerated basis. Additionally, we selected
Priceline as the competitor of Expedia and made similar adjustments
of Priceline of financial statements for 2013 since both companies
are in the same industry.
Capitalizing operating leases:
Lessees prefer to treat lease as operating lease rather than
capital lease because capital lease appear as assets and
liabilities on the balance sheet and make the company more risker.
Based on the reason, managers will avoid using capital lease and
will use operating lease instead. The problem is that using the
operating lease can cause the analyst to understate the short-term
liquidity or long-term solvency risk of the firm (Wahlen, Baginski
& Bradshaw, P490). After converting operation lease to capital
lease, the adjusted financial statement will help the analyst to
get the appropriate and reasonable analysis. Based on the rational
idea, we decided to restate the financial statements of Expedia and
Priceline to convert all operating leases into capital lease, which
will better reflect economic situation for both firms and also keep
a more conservative measure of total liabilities from the view of
accounting. Managers of Expedia disclosed the related information
on the financial statement d note 16 and 15 of lease commitment for
2013 and 2012. Priceline disclosure the 2013 lease commitment on
the financial statement note 16.We started the adjustment of
converting operation lease to capital lease on the balance sheet.
The first step of converting operating lease to capital lease is to
calculate the lease commitments in the present values terms. We
used the lessees incremental borrowing rate for secured debt with
similar to that of the leasing arrangement. Expedias borrowing
rates, based on interest expense as a percentage of average short
and long-term borrowing for 2013 and 2012, are 6.99% and 7%
respectively. Pricelines borrowing rate is 4.5% for 2013 using the
same calculation method. The present value of each cash flow equals
the cash flow times a present value factor. The present values of
all of Expedias operating lease payments are $211,029 thousands and
$179,590 thousands for 2013 and 2012 respectively, and the present
value of Pricelines operating lease payment is $265,517 thousands
for 2013. Since we capitalized operating lease, we will add the
$211,029 thousands and $179,590 thousands into Expedias property,
plant, and equipment net of 2013 and 2012, and add $265,517
thousands for Pricelines PPE in 2013. Relatively to liability
account, Expedias current debt of 2013 and 2012 will increase by
$43,744 thousands and $31,175 thousands respectively, and long-term
debt will increase by $167,285 thousands and $148,415 thousands.
Pricelines current debt and long-term debt of 2013 will also need
to adjust by $37,743 thousands and $227,773 thousands. To some
extent, adjusting the balance sheet with capitalizing operation
lease could certainly and substantially or slightly affect some
ratios by different amounts added (Wahlen, Baginski & Bradshaw,
P491). For example, Expedias unadjusted long-term debt to
shareholders equity in 2013 was 55% based on $1,249,412/
$2,258,985. After adding the long-term portion of the capital lease
liability, the ratio will increased to 63% based on
($1,249,412+$167,285)/ $2,258,985. Compare with that of Expedia,
Pricelines long-term ratio also increase substantially due to the
adding big portion of long-term debt in 2013.Consistent with
changes on the balance sheet, income statement also needs to be
adjusted because rent expenses will be eliminated and depreciation
and interest expenses will be added due to the capitalized asset
and lease obligation recognized on the balance sheet. For Expedia,
both years lease expenses are greater than combining depreciation
and interest expenses, which increase equity after net of tax by
$28,150 thousands and $27,474 thousands for 2013 and 2012
respectively. In comparison, Pricelines equity in 2013 decreases by
$1,705 thousands due to the rent expenses are less than the
combining deprecation and interest expenses. After all the
adjustments were made, comparability of Expedia and Priceline
financial statements will be improved.
Converting PP&E to Accelerated basis
Calculation of depreciation is based on the historical cost of a
long-loved asset less than salvage life to the periods of its use
in a rational manner. Salvage life may vary from time to time. For
example, technology upgrade changes so fast that its life will be
obsolescence shortly (Wahlen, Baginski & Bradshaw, P538).
Assets life estimation is very subjective since mangers determine
the assets useful life based on their own needs. Due to the
subjective of assets useful life, managers often chose to extend
assets life to a longer period to get a lower depreciation expenses
in order to get higher earnings on the income statement. GAAP
allows firms in the United States to utilize two depreciation
methods. Firms can use straight-line depreciation for preparing
financial reporting and accelerated depreciation for tax purpose.
Based on the requirements of the assignment, we converted the
straight-line basis of Expedia and Priceline to accelerated basis
to analyze the financial statement. We identified the deferred tax
liability related to property plant and equipment disclosed in the
note 11 of income tax. However, there is no necessary for adjusting
the property, plant and equipment of Priceline because depreciation
expenses of PP&E are integrated with other amortization
expenses of intangible assets in the footnote.To convert the
straight-line depreciation to accelerated depreciation, firstly we
adjusted balance sheets of Expedia in 2013 and 2012. We calculated
the excess accumulated depreciation over time of $226,354 thousands
in 2013 and $700,500 thousands in 2012 by deferred tax liability
divided by the tax rate. Secondly, the calculation of income
statement adjustment is based on the difference between deferred
tax liabilities of current year and previous year. Expedia has a
positive deferred tax liability at $24,286 thousands in 2012 and a
negative deferred tax liability at $30,488 thousands in 2013. After
getting the change of deferred tax liability for 2012 and 2013, we
used the change divided by the tax rate to get the excess
depreciation expenses, which determines the relationship with net
income. In 2012, a positive change deferred tax liability Expedia
has indicated that Expedia has a higher deprecation expenses and
pay lower tax expenses now and higher in the future years if
Expedia used the tax method. Then the effect of using accelerated
method will decrease in 2013 net income at $162,529. However, the
increase in deferred tax liability in 2013 is negative. This
happens because Expedia has depreciated its assets for several
years and assets probably just reach in the middle of life in 2013.
Hence, Expedia gets lower deprecation expenses and pay more taxes
by $30,488 now in tax method than in booking keeping. Hence, net
income will increase by $78,397.
LIFO To FIFO
Since Priceline and Expedia are both website for purchasing
discounted air tickets, they do not have inventory so that we did
not need adjust the inventory from LIFO to FIFOR&D
Priceline did not have any research and development cost related
to the business and we did not need to make any adjustment.
Allowance for doubtful account
Because the customers of Priceline and Expedia mainly pay with
credit card, they do not have the allowance for doubtful
account.
Ratio Analysis
Note: The results of the following adjustment are shown on the
adjusted financial statement in the Appendix:
Profit Ratio
A common size analysis of balance sheet and income statement of
Expedia and Priceline was performed. Expedia has a higher level of
Cost of sales and selling, general and administrative costs than
Priceline, indicating that Priceline was doing better at managing
costs and overhead. In addition, the rations show that Priceline
shows robust revenue growth with reasonable debt levels, and
expansion of its profit margins. And although Expedias competitor
shows weak operating cash flow they are doing well at net income.
Comparatively, Expedias operating earnings have been dropping for
the past 4 years, despite rising revenues, and as mentioned before,
SG&A is on the rise
Risk ratio
Current ratio indicates the firms ability of using cash and
other current assets to cover obligations coming due within one
year. working capital turnover ratios measure the cash-generating
ability of operations and the short-term liquidity risk. Debt
ratios measure the amount of liabilities, particularly long-term
debt, in a firms capital structure. The higher this proportion, the
greater the long-term solvency risks. Operating cash flow to total
liabilities ratio assesses whether the firm could generate cash
flow from operations to service debt. Z-core is a model used to
predict the firms possibility of bankruptcy. Data less than 1.81
indicated a high probability of bankruptcy, while higher than 3.0
indicated a low probability of bankruptcy. between 1.81 and 3.00 is
fray area. By all measures mentioned above,, Priceline is doing
better than Expedia, as shown in the appendix.
Sustainability
As Expedia moves forward, threats to the firm beyond its
competitors include the ease of entry to the online travel company
market, which allows for the introduction of new competitors. In
the modern day, travel and tourism enterprises that have access to
the internet can easily set up a website, and many small hotels,
lodges, and tour operators are establishing a presence online. This
offers customers the option to book directly.Also, the firms
dependence on the state of the economy and peoples discretionary
incomes lends to its susceptibility as demonstrated by the recent
economic downturn. Another possible future challenge for the
company is the fact that during difficult economic times, people do
not have money to spend on vacations, and companies attempt to
reduce costs by cutting business related travel. So, in the past,
Expedias financial success would often shift with the overall
economy, and therefore in the future, the company might be
especially vulnerable to volatile downturns.Moving forward, the
travel and tourism industry is certainly changing, as it responds
to evolving customer demands and behavior. In the modern day,
people increasingly research and book vacations online, especially
in the United States, with 66% of travelers plan their vacations on
line and 56% actually book their itineraries on the internet. This
trend is a major reason why Expedia has proven so successful since
its creation in 1996. Certainly, the internet will only become a
larger part of the trip planning process in the future, and that is
where the companys future success lies.According to market research
company Euromonitor International, Expedia was the top online
travel agency globally with gross bookings for $39.4 billion in
2013, followed by Priceline at $39.2 billion in the same year.
Chinese and Indian players such as Ctrip and MakeMyTrip are also
growing rapidly in the OTA space. Euromonitor said that in this
constantly changing environment, a new generation of companies
coming from the mobile and peer-to-peer sectors and from emerging
economies may become the future giants of the travel industry.
Expedias growth will be driven by investment in new technologies
allowing a more sophisticated user targeting and more customized
service. Online travel consumers are constantly evolving as they
increasingly embrace mobile devices, request more personalized
real-time services, and enjoy sharing travel reviews and services
with their peers. Another research company, PhoCusWright, estimates
global travel spending at over $1 trillion, with an increasing
share booked through online channels each year. Expedia believes
there is a significant growth opportunity as its gross bookings
represent only about 4% of this spending. Its primary growth
drivers are technology and product innovation, global expansion,
and new channel penetration. One of the main channels Expedia plans
to invest heavily is in developing mobile applications. We think
mobile is a huge opportunity, Expedias CFO Okerstrom said. It has
gone from a theory to reality, and I think it is done so faster
than we and everyone in e-commerce thought it would. Already,
Okerstrom reports, Expedia brands have had more than 90 million
downloads of their mobile applications and, in December 2013, 20
percent of current transactions were taking place via mobile
devices. The mobile applications have delivered new capabilities to
consumers. One application, for example, allows users to locate and
book a hotel room from the road for check-in at midnight the same
night. That type of technology didnt really exist before, Okerstrom
said. One key benefit of the platform upgrades to mobile
technologies, says Okerstrom, is that it also enables us to
integrate partners very easily. And the company has moved
aggressively to acquire and integrate partners, most recently with
the acquisition last March of the hotel search engine Trivago. They
all have their own specific strength, said Okerstrom of Expedias
broad array of brands. We have really no brands that are directly
head to head. For example, while the flagship Expedia brand offers
multiple products hotel rooms, car rentals, surfing lessons
Hotels.com offers just discounted hotel rooms. Each strategy, says
Okerstrom, resonates with certain types of consumers. Another
Expedia brand, Hotwire, follows yet another strategy by offering
deeply discounted rooms opaquely. That is, the consumer knows the
star rating and the general location of the hotel, but not the
specific facility. In order to keep its relevance in the market
place, Expedia will need to keep developing its technological edge.
It is a very competitive market and there are a lot of people who
like to invest in travel startups, and you see a lot of innovation
coming from outside the industry, the CFO said. To retain our own
competitive advantage we really cant be complacent.
Reference:
Expedia Media Solutions Expands Travelads Search Advertising
Program To New International Markets. (n.d.). Retrieved December 4,
2014, from http://www.hotelnewsresource.com/article54569
(n.d.). Retrieved December 4, 2014, from
http://finance.yahoo.com/q/in?s=EXPE Industry
Chen, Kuo Lane, Huei Lee, and Cynthia C. Barnes. "An Analysis of
E-Commerce Strategy. Used by Internet Travel Sites." Issues in
Information Systems 3 (2002): 102-108. Web. 25 Feb. 2011. .
McCartney, Scott. Expedia Drops Air Booking Fees: Temporary or
Start of a Trend. The Wall Street Journal, 12 March 2009. Web. 22
April 2011. . Expedia promotes enterprise data strategy for growth,
agility. (n.d.). Retrieved November 24, 2014, from
http://searchbusinessanalytics.techtarget.com/feature/Expedia-promotes-enterprise-data-strategy-for-growth-agility
There are no shortcuts to investing. (n.d.). Retrieved November
24, 2014, from
http://marketrealist.com/2014/04/must-know-investor-overview-expedia/
Form 10-K. (n.d.). Retrieved November 24, 2014, from
http://www.sec.gov/Archives/edgar/data/1324424/000119312513039072/d446158d10k.htm
Baginski, Bradshaw, and Wagken. :Financial Rreporting, Financial
Statement Analysis, and Valuation 7e
Appendix A- Expedia consolidated Balance Sheet and
Adjustments
EXPEDIA, INC.
CONSOLIDATD BALANCE SHEETS
December 31,
2103 Adj Adj 2013 2,012AdjAdj 2012
(In thousands, except per share data)
ASSETS
Current assets:
Cash and equivalents $1,021,033 1,021,033 1,293,1611,293,161
Restricted cash and cash equivalent26,042 26,042
21,47521,475
Short-term investments325,510 325,510 644,982644,982
Accounts receivable, net of allowance of $11,555 and
$10,771614,735 614,735 461,531461,531
Deferred income taxes66,130 66,130 83,03483,034
Income taxes receivable64,296 64,296 27,76427,764
Prepaid expenses and other current assets101,541 101,541
110,319110,319
Total current assets2,219,28702,219,2872,642,2662,642,266
Property and equipment, net480,702 211,029 465,377 409,373
179,590 -111,537
Long-term investments and other assets250,626 -226,354 250,626
224,231-$700,500 224,231
Deferred income taxes14,151 14,151 19,78719,787
Intangible assets, net1,111,041 1,111,041 821,419821,419
Goodwill3,663,674 3,663,674 3,015,6703,015,670
TOTAL ASSETS7,739,4817,724,1567,132,7466,611,836
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, merchant1,044,259 1,044,259 954,071954,071
Accounts payable, other261,288 261,288 283,029283,029
Deferred merchant bookings1,350,319 1,350,319
1,128,2311,128,231
Deferred revenue39,746 39,746 26,47526,475
Income taxes payable61,874 61,874 62,02562,025
current debt 0 43,744.00 43,744 0 31,175.00 31,175
Accrued expenses and other current liabilities536,895 536,895
556,244556,244
Total current
liabilities3,294,38143,7443,338,1253,010,07531,1753,041,250
Long-term debt1,249,412 167,285 1,416,697
1,249,3451484151,397,760
Deferred income taxes433,532 -63,379.00 370,153
343,553-93867249,686
Other long-term liabilities138,300 138,300 126,912126,912
Commitments and contingencies - 0
Redeemable noncontrolling interests364,871 364,871
13,47313,473
Stockholders' equity: - 0
Common stock $.0001 par value19 19 1919
Authorized shares: 1,600,000 - 0
Shares issued: 192,562 and 189,255 - 0
Shares outstanding: 116,886 and 122,530 - 0
Class B common stock $.0001 par value 1 1 11
Authorized shares: 400,000 - 0
Shares issued and outstanding: 12,800 and 12,800 - 0
Additional paid-in capital5,802,140 5,802,140
5,675,0755,675,075
Treasury stock-Commno stock, at cost-3,465,675
(3,465,675)-2,952,790-2,952,790
Shares: 75,676 and 66,725 - 0
Retained earnings (deficit)-209,218
(209,218)-442,068-442,068
Accumulated other comprehensive income (loss)18,197 18,197
2222
Total Espedia, Inc. stockholders'
equity2,145,4642,145,4642,280,25902,280,259
Noncontrolling interest113,521 113,521 109,129109,129
Total stockholders'
equity2,258,985-162,9752,096,0102,389,388-606,6331,782,755
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY7,739,4817,724,1567,132,7466,611,836
Appendix B- Expedia Consolidated Statement of Operations and
Adjustments
EXPEDIA, INC.0
CONSOLIDATED STATEMENTS OF OPERATIONS0
Year ended December 31, 0
21032,0122,012
( In thousnads, except for per share data) 0
Revenues:$4,771,259 4,771,259 4,030,3474,030,347
Costs and expense:0
Cost of revenue -1,038,034.00 (1,038,034)-898,604-898,604
Selling and marketing (including $217,771,$205,027, and $211,018
with a related party) -2,196,145.00
(2,196,145)-1,721,037-1,721,037
Technology and content -577,820.00 (577,820)-484,898-484,898
General and administrative -377,078.00
(377,078)-345,354-345,354
Amortization of intangible assets -71,731.00
(71,731)-31,705-31,705
lease expenses - 84,000.00 84,000 070,00070,000
depreciation expenses - -30,147.00 78,739 0-25656-212,471
Acquisition-related and other -66,472.00 108,886.00
(66,472)-1868150
Lefal reserves, occupancy tax and other -77,919.00
(77,919)-117,025-117,025
Operating income366,060162,739528,799431,724-142,471289,253
Other income (expense):0
Interest income24,779 24,779 26,39626,396
Interest expense-87,358 -14,755.00
(102,113)-87,788-12619.00-100,407
Other, net-2,788 (2,788)-20,275-20,275
Total other expense,
net-65,367-14,755-80,122-81,667-12,619-94,286
Income from continuing operatations befor income taxes300,693
448,677 350,057 194,967
Provisions for income taxes-84,335 -30,488.00
(125,797)-47,07824286-27,313
Income from continuing
operations216,358-10,974322,880302,979-4,521167,654
Discontinued operations, net of taxes-22,539-22,539
Net income216,358 322,880 280,440145,115
Year ended December 31, 0
21032,0122,012
Net (income) loss attributable to noncontrolling interests16,492
16,492 -269-269
Net income attributable to Expedia, Inc.232,850 232,850
280,171144,846
Amounts attributable to Expedia, Inc. - 0
Income from continuing
operations232,850232,850280,171144,846
Discontinued operations, net of taxes - -22,539-22,539
Net income232,850 232,850 257,632122,307
Earnings per share from continuing operations avaliable to
common stockholders: - 0
Basic1.73 2 22
Diluted1.67 2 22
Earnings per share attributable to Expedia, Inc. avaliable to
common stockholders: - 0
Basic1.73 2 22
Diluted1.67 2 22
Shares used in computing earningsper share: - 0
Basic134,912 134,912 134,203134,203
Diluted139,593 139,593 139,929139,929
Dividends declared per common share0.56 1 11
(1) Includes stock-based compensation as follows: - 0
Cost of revenue3,752 3,752 3,2963,296
Selling and marketing16,190 16,190 13,47413,474
Technology and content20,465 20,465 16,07316,073
General and administrative33,123 33,123 31,75331,753
Acquisition-related and other56,643 56,643 0
Appendix C- Priceline Consolidated Balance Sheet and
AdjustmentsPRICELINE
CONSOLIDATED BALANCE SHEET
2013AdjAdj 20132012adj 2012
ASSETS
Current assets:
Cash and cash
equivalents1,289,9941,289,9941,536,3491,536,349
Restricted cash 10,47610,4766,6416,641
Short-term investments 5,462,7205,462,7203,646,8453,646,845
Accounts receivable, net of allowance for doubtful accounts of
14,116 and 10,322 repectively535,962535,962367,512367,512
Prepaid expenses and other current
assets107,102107,10284,29084,290
Deferred income taxes74,68774,68740,73840,738
Total current assets7,480,94107,480,9415,682,3755,682,375
00
Property and equipment, net135,053 265,516.00
400,56989,26989,269
Intangible assets, net1,019,9851,019,985208,113208,113
Goodwill 1,767,9121,767,912522,672522,672
Deferred income taxes7,0557,05531,48531,485
Other assets33,51433,51435,82835,828
Total assets10,444,460265,51610,709,9766,569,7426,569,742
2013AdjAdj 20132012adj 2012
LIABILITIES AND STOCKHOLDERS' EQUITY00
Current liabiities:00
Accounts payable 247,345247,345184,648184,648
Accrued expenses and other current
liabilities545,342545,342387,991387,991
Deferred merchant bookings437,127437,127368,823368,823
current debt037,74337,743
Convertible debt(See Note 11)151,931151,931520,344520,344
Total current
liabilities1,381,74537,7431,419,4881,461,7261,461,726
00
long-term debt0227,773227,773
Deferred income taxes326,425326,42545,15945,159
Other long-term liabilities 75,98175,98168,94468,944
Convertible debt(See Note
11)1,742,0471,742,047881,996881,996
Total liabilities3,526,19837,7433,791,7142,457,8252,457,825
00
Commitments and Contingencies(See Note 16)00
Redeemable noncontrolling interests(See Note
11)00160,287160,287
Convertible debt(See Note 11)8,5338,53354,65554,655
00
Stockholders' equity00
Common stock, $0.008 par value, authorized 1,000,000,000 shares,
61,265,160 and 58,055,586 shares issued,
respectively476476450450
Treasury stock, 9,256,721 and 8,184,787,
respectively-1,987,207-1,987,207-1,060,607-1,060,607
Additional paid-in capital
4,592,9794,592,9792,612,1972,612,197
Accumulated earnings4,218,7524,218,7522,368,6112,368,611
Accumulated other comprehensive
income(loss)84,72984,729-23,676-23,676
Total stockholders'
equity6,909,72906,909,7293,896,9753,896,975
Total liabilities and stockholders'
equity10,444,46037,74310,709,9766,569,7426,569,742
Appendix D- Priceline Net Income and AdjustmentsPRICELINE NET
INCOME AND ADJUSTMENTS2013AdjAdj 20132012adj 2012
Agency revenues4,410,6894,410,6893,142,8153,142,815
Merchant revenues2,211,4742,211,4742,104,7522,104,752
Advertising and other revenues171,143171,14313,38913,389
Total revenues6,793,3066,793,3065,260,9565,260,956
Cost of revenues-1,077,420-1,077,4201,177,2751,177,275
Gross profit 5,715,8865,715,8864,083,6814,083,681
Operating expenses:00
Advertsing-Online-1,798,645-1,798,6451,273,6371,273,637
Advertsing-Offline-127,459-127,45935,49235,492
Sales and marketing-235,817-235,817195,934195,934
Personnel, including stock-based compensation of
140,526,$65,724,respectively-698,692-698,692466,838466,838
General and administrative-252,994-252,994173,171173,171
Information technology-71,890-71,89043,68543,685
lease expenses040,00040,000
Depreciation and
amortization-117,975-29,502-147,47765,14165,141
Total operating
expenses-3,303,472-3,292,9742,253,8882,253,888
Operating income 2,412,4142,422,9121,829,7931,829,793
Other income(expense):00
Interest income4,1674,1673,8603,860
Interest expense-83,289-11,948-95,237-62,064-62,064
Foreign currency transaction and
other-36,755-36,755-9,720-9,720
Total other income(expense)-115,877-115,877-67,924-67,924
Earnings before income
taxes2,296,5372,307,0351,761,8691,761,869
Income tax expense-403,739-255-403,994337,832337,832
Net income 1,892,7981,903,0411,424,0371,424,037
Less: net income attributable to noncontrolling
interests1351354,4714,471
Net income applicable to common
stockholders1,892,6631,892,6631,419,5661,419,566
Net income applicable to common stockholders per basic common
share37372828
Weighted average number of basic common shares
outstanding50,92450,92449,84049,840
Net income applicable to common stockholders per diluted common
share36362727
Weighted average number of diluted common shares
outstanding52,41352,41351,32651,326
20132012
Net income 1,892,7981,424,037
Other comprehensive income(loss),net of tax
Foreign currency translation adjustments(1)97,97069,683
Unrealized gain(loss)on marketable securities(2)21-620
Comprehensive income1,990,7891,493,100
Less:Comprehensive income(loss) attributable to redeemable
noncontrolling interests-10,2799,628
Comprehensive income attributable to common
stockholders2,001,0681,483,472
Appendix E- Comparative Profit Ratios Expedia Vrs. Priceline
Profit analysis
ExpediaPriceline
201320122013
Profit Margin4.88%3.03%28.01%
Asset Turnover61.77%60.96%63.43%
Return on Assets3.01%1.85%17.77%
Profit Margin for ROCE4.88%3.03%28.01%
Asset Turnover61.77%60.96%63.43%
Capital structure leverage368.52%370.88%155.00%
Return on Common Equity11.11%6.86%27.54%
Cost of goods sold margin21.76%22.30%15.86%
Selling, general and administration margin53.93%51.27%35.55%
Gross profit margin78.24%77.70%84.14%
Profit margin6.77%3.60%28.01%
Appendix F- Comparative Common Size Income Statement Expedia
Vrs. Priceline
ExpediaPriceline
210320122013
Common Size Income Statement
Sales111
Cost of sales-22%-22%-16%
Gross profit78%78%84%
SG&A-54%-51%-7%
Operating income11%7%36%
Interest Expense-2%-2%-1%
Other expense0%-1%-2%
Income before income taxes9%5%34%
Income tax provision-3%-1%-6%
Net income5%3%28%
Appendix G- Comparative Common Size Balance Sheet Expedia Vrs.
Priceline
ExpediaPriceline
210320122013
Common size balance sheet
Assets:
Cash and cash equivalents13%20%12%
Accounts receivable, net8%7%5%
Short-term investments4%10%51%
Deferred income taxes1%1%1%
Common Size Income Statement
Prepaid expenses and other current assets1%2%1%
Total current assets29%40%70%
Property and equipment, net6%-2%4%
Deferred income taxes0%0%0%
Intangible assets, net14%12%0%
Goodwill47%46%17%
Total assets100%100%100%
Liabilities and shareholders' equity
Accounts payable17%19%5%
Deferred merchant bookings17%17%4%
current debt 1%0%0%
Accrued expenses and other current liabilities7%8%5%
Total current liabilities43%46%13%
Long-term debt18%21%2%
Deferred income taxes5%4%3%
Other long-term liabilities2%2%1%
Total liabilities73%73%35%
Common stock0%0%0%
Additional paid-in capital75%86%43%
Retained earnings (deficit)-3%-7%39%
Accumulated other comprehensive income (loss)0%0%1%
Total stockholders' equity27%27%65%
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY111
Appendix H: Risk Analysis Expedia Vrs. Priceline
Risk analysis
ExpediaPriceline
1. Short-term liquidity risk210321022103
(1) Current ratio66%87%527%
(2) Quick ratio50%58%129%
(3) Operating cash flow to current liabilities
ratio23%41%69%
(4) Working capital ratios
a) Accounts receivable turnover776%873%1267%
Days receivables held4703%4180%2880%
b) Accounts payable turnover80%73%436%
Days payables held45906%50249%8379%
(5) Revenues to cash ratio467%312%527%
(6) Days revenues held in cash7811%11711%6931%
Risk analysis
ExepidaPriceline
2. Long-term solvency risk
(1) Debt ratios
a) Liabilities to assets 73%73%35%
b) liabilities to shareholders' equity269%271%55%
c) Long-term debt to long-term capital40%44%3%
d) Long-term debt to shareholders' equity68%78%3%
1. Short-term liquidity risk210321022103
(2) Interest coverage ratios (cash)971%1359%2941%
(3) Operating cash flow to total liabilities ratio14%26%61%
3. bankrupcy prediction
Z-core87%79%269%
Appendix I- Forecast Assumptions
Assumptions201320142015201620172018
Income Statement
Sales Growth14%18%15.00%15.00%15.00%17.00%17.00%
Cost of sales (% of
Sales)13%16%15.00%15.00%15.00%15.00%15.00%
SG&A (% of Sales)18%20%20.00%20.00%20.00%20.00%20.00%
interest expense(% of debt)6%7%7.00%7.00%7.00%7.00%7.00%
tax rate (% of pretax
income)28%28%28.00%28.00%28.00%28.00%28.00%
Balance Sheet
Operating
Days Cash117.11 78.11 100.00 100.00 100.00 100.00 100.00
Days Other Investments(ST)58.41 24.90 40.00 40.00 40.00 40.00
40.00
days receivable41.80 47.03 44.00 44.00 44.00 44.00 44.00
Inventory Turnover
Assumptions201320142015201620172018
Income Statement
Days Payable112.04 459.06 250.00 250.00 250.00 250.00 250.00
Financing
Long-term Debt/Total
Assets21.14%18.34%20.00%20.00%20.00%20.00%20.00%
Sales Growth14%18%15.00%15.00%15.00%17.00%17.00%
Appendix J- Expedia Income Statement Forecast
201320142015201620172018
Income Statement
Net sales (% Growth in Sales)4,771,259 4,771,259 4,771,259
4,771,259 4,771,259 4,771,259
Cost of sales (% of Sales)1,038,034 1,193,739 1,372,800
1,578,720 1,847,102 2,161,110
Gross margin3,733,225 3,577,520 3,398,459 3,192,539 2,924,157
2,610,149
SG&A (% of
Sales)(2,573,223)(715,689)(715,689)(715,689)(811,114)(811,114)
Other Operating Expenses(77,919)
Nonrecuring Gains and Losses
Operating income1,082,083 2,861,831 2,682,770 2,476,850
2,113,043 1,799,035
Investment and other income
Interest Income (% of investment)24,779 261,439 261,439 261,439
261,439 261,439
Net Interest Expense (% of net
debt)(102,113)(3,521)(4,050)(4,657)(5,356)(6,159)
Income before income taxes & chg in acct principle1,004,749
3,119,749 2,940,159 2,733,632 2,369,126 2,054,315
Income tax provision281,330 873,530 823,245 765,417 663,355
575,208
Net income1,286,079 3,993,278 3,763,404 3,499,049 3,032,481
2,629,523
- Preferred dividends
= Net income to common1,286,079 3,993,278 3,763,404 3,499,049
3,032,481 2,629,523
Assuming Dividend Payout+
Dividends1 1 1 1 1 1
771,647 2,395,967 2,258,042 2,099,429 1,819,489 1,577,714
Appendix K- Expedia Balance Sheet Forecast
201320142015201620172018
Balance Sheet
ASSETS
Current assets:
Cash and equivalents 1,021,033 1,307,194 1,307,194 1,307,194
1,307,194 1,307,194
Restricted cash and cash equivalent 26,042 29,948 34,441 39,607
46,340 54,218
Short-term investments 325,510 522,878 522,878 522,878 522,878
522,878
Accounts receivable, net of allowance of $11,555 and $10,771
614,735 575,165 575,165 575,165 575,165 575,165
Deferred income taxes 66,130 76,050 87,457 100,575 117,673
137,678
Income taxes receivable 64,296 73,940 85,031 97,786 114,410
133,860
Prepaid expenses and other current assets 101,541 116,772
134,288 154,431 180,684 211,401
Total current
assets2,219,2872,701,9482,746,4542,797,6372,864,3452,942,393
Property and equipment, net 465,377 535,184 615,461 707,780
828,103 968,880
Long-term investments and other assets 250,626 288,220 331,453
381,171 438,346 504,098
Deferred income taxes 14,151 16,274 18,715 21,522 24,750
28,463
Intangible assets, net 1,111,041 1,277,697 1,469,352 1,689,754
1,943,218 2,234,700
Goodwill 3,663,674 4,213,225 4,845,209 5,571,990 6,407,789
7,368,957
TOTAL
ASSETS7,724,1569,032,54710,026,64411,169,85412,506,55114,047,492
201320142015201620172018
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, merchant 1,044,259 817,630 940,274 1,081,315
1,265,139 1,480,212
Accounts payable, other 261,288 300,481 345,553 397,386 456,994
525,543
Deferred merchant bookings 1,350,319 1,552,867 1,785,797
2,053,666 2,361,716 2,715,974
Deferred revenue 39,746 45,708 52,564 60,449 69,516 79,943
Income taxes payable 61,874 71,155 81,828 94,103 108,218
124,451
current debt 43,744 50,306 57,851 66,529 76,509 87,985
Accrued expenses and other current liabilities 536,895 617,429
710,044 816,550 939,033 1,079,888
Total current
liabilities3,338,1253,455,5753,973,9124,569,9985,277,1256,093,996
Long-term debt 1,416,697 1,806,509 2,005,329 2,233,971 2,501,310
2,809,498
Flex financial - Long-term Debt (1,358,504) (1,501,858)
(1,670,467) (1,829,472) (2,074,003)
Deferred income taxes 370,153 425,676 489,527 562,956 658,659
770,631
Other long-term liabilities 138,300 159,045 182,902 210,337
241,888 278,171
Commitments and contingencies -
Redeemable noncontrolling interests 364,871 419,602 482,542
554,923 649,260 759,634
Stockholders' equity: -
Common stock $.0001 par value 19 19 19 19 19 19
Authorized shares: 1,600,000 -
Shares issued: 192,562 and 189,255 -
Shares outstanding: 116,886 and 122,530 -
Class B common stock $.0001 par value 1 1 1 1 1 1
Authorized shares: 400,000 -
Shares issued and outstanding: 12,800 and 12,800 -
Additional paid-in capital 5,802,140 6,672,461 7,673,330
8,824,330 10,147,979 11,670,176
Treasury stock-Commno stock, at cost (3,465,675) (3,985,526)
(4,583,355) (5,270,858) (6,061,487) (6,970,710)
Shares: 75,676 and 66,725 -
Retained earnings (deficit) (209,218) 1,597,311 1,505,362
1,399,620 1,212,992 1,051,809
Accumulated other comprehensive income (loss) 18,197 20,927
24,066 27,675 31,827 36,601
flex financial -Treasury
Stock(50,000.0)(75,000.0)(100,000.0)(125,000.0)(150,000.0)
Total Espedia, Inc. stockholders'
equity2,145,4644,255,1934,544,4224,880,7865,206,3315,637,896
Noncontrolling interest 113,521 130,549 150,132 172,651 198,549
228,331
Total stockholders'
equity2,096,0104,124,6434,394,2914,708,1355,007,7825,409,564
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY7,724,1569,032,54710,026,64411,169,85412,506,55114,047,492
Appendix L- Companys ValuationAfter the 5th year growth will be
15%.
Assume the cost of capital is 20%.
Assume a dividend payout ratio given below
Assume 1000 shares
Dividend Discount Model - perptuity and perptuity with a
constant growth rate(these 2 are not in book, not on test)
PerptuityPrice= Div1/r
Perptuity with constant growthPrice = Div1 / (r-g)
Dividend Discount Model - 2 stage. Stage 1 - take the present
value of forecasted dividends for a period of time (5, 10
years)
Stage 2 - then calculate a terminal value
Price= Div1/(1+r)+Div2/(1+r)^2+Div3/(1+r)^3+ +terminal
value/(1+r)^n
Cost of Capital (r)0.2000
After the 5th year growth will be 15%.
Number of Shares1,000.0000
Growth after estimation period (g)0.1500
Year2,007.0000 2,008.0000 2,009.0000 2,010.0000 2,011.0000
Terminal
Period1.0000 2.0000 3.0000 4.0000 5.0000 5.0000
Step 1 - We have forecast payout ratio and income for 5 years.
Thus we can calculate dividends
Assume the cost of capital is 20%.
Net income (earnings) avaiable to common
shareholders3,993,278.0894 3,763,404.0749 3,499,048.9583
3,032,481.1128 2,629,523.3661
Assuming Dividend Payout 60% 0.6000 0.6000 0.6000 0.6000
0.6000
Dividends2,395,966.8536 2,258,042.4449 2,099,429.3750
1,819,488.6677 1,577,714.0197
Less: Common Stock Issues0.0000 0.0000 0.0000 0.0000 0.0000
Plus: Common Stock Repurchase500,000.0000 250,000.0000
250,000.0000 250,000.0000 250,000.0000
Total Dividends to Common Equity2,895,966.8536 2,508,042.4449
2,349,429.3750 2,069,488.6677 1,827,714.0197
Step 2 - Calculate the Continuing (Terminal) Value
Terminal value = year 6 dividend/(discount rate - sustainable
growth)
Year 6 dividend is Dividend(T+1)=NI(T+1) + BV(t) - BV (T+1)
based on clean surplus
Dividend(T+1)=NI(1+g)) + BV(T) - BV(T) (1+g)
Terminal value =[NI(1+g)) + BV(T) - BV(T) (1+g)]/(R-g)
Terminal value =
[(2,629,523*(1+.15))+(4,059,564-0)-(4,059,564-0)(1+.15)]/(.20-.15)
60,451,035.6482
Step 3 - Calculate the Present value of Dividends and terminal
valuePV of Div1PV of Div2PV of Div3PV of Div4PV of Div5PV of
DTerminal
Present Value of Dividends (Div/(1+r)^n)2,413,305.7113
1,741,696.1423 1,359,623.4809 998,017.2973 734,517.2726
24,293,915.4322
Step 4 - Sum up PV then divide by shares31,541,075.3366
Per share (total PV/shares)31,541.0753