Expedia

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, airlines 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


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


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%


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%


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


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)


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

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