Equity value project

11/2/2015

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Your Mission is to find the Value  of Equity of 

Square, Inc.

So you have two choices

• Accept the project – If you accept the project, you can only rely on  your team. (If you get caught, I do not recognize  you!! )

• Drop the course

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• The message will be destroyed in 3 seconds

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If you accept the mission:

• I guarantee that you will get frustrated. This is part of  the learning experience! g p

• Don’t you watch any Kung‐Fu movies? – Grasshoppers always suffer 

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Square, Inc

• Square, Inc. is a financial services, merchant services aggregator and mobile payment company based in San Francisco California The company markets several software and hardwareFrancisco, California. The company markets several software and hardware payments products, including Square Register and Square Reader, and has expanded into small business services such as Square Capital, a financing program, and Square Payroll. The company was founded in 2009 by Jack Dorsey and Jim McKelvey and launched its first app and service in 2010.

• Square Register allows individuals and merchants in the United States, Canada, and Japan to accept offline debit and credit cards on their iOS or Android smartphone or tablet computer. The application software("app") supports manually entering the card details or swipingsoftware( app ) supports manually entering the card details or swiping the card through the Square Reader, a small plastic device that plugs into the audio jack of a supported smartphone or tablet and reads the magnetic stripe. On the iPad version of the Square Register app, the interface resembles a traditional cash register.

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Steps in the Project: Predicting Cash Flows

• Download and read the documents in Edgar. – http://www.sec.gov/edgar.shtmlp // g / g – And find the all files that are filed (especially S1)

• Find the information relevant to future sales. • Construct the Pro‐forma income statement. • Estimate future free cash flows for the next five years 

(account for investments, change in working capital,  depreciation and taxes)

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• Make a reasonable assumption about the growth rate of  cash flows until infinity.

Calculating the WACC

• Find comparable companies.  • Find the equity betas and leverage of comparableFind the equity betas and leverage of comparable 

companies.  • Calculate asset betas of comparable companies 

(will learn how to soon) • Make an assumption about the target capital 

structure (leverage) of your company • Use the comparable companies’ asset beta to

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Use the comparable companies  asset beta to  calculate WACC and Re for your company.

• Use the Rm‐rf from your book, do not try to  estimate them. 

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Calculating Equity Value

• Discount company free cash flows with WACC  t fi d th ti fi l d bt t lto find the entire firm value and subtract value  of debt (Let’s all use this method). 

• Or calculate cash flows to equity holders   discount by using Re.

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Comparable Company Analysis

• Which multiples are used in this industry to  l fi i dditi t P/E lti l th tvalue firms in addition to P/E multiple that we 

learned in class. 

• Find the multiples of comparable companies.

• Use these multiples to find a range of  valuation for your company

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valuation for your company. 

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Comparable Transactions

• You can look at multiples at merger and  i iti t tiacquisition transactions. 

• The price paid may also include control  premium, therefore use caution. 

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Sensitivity Analysis

• Which assumptions you made are the most  i t t f th l f thimportant ones for the value of the company.

• Show how the value of the company changes  as you change those assumptions. 

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Executive Summary

• Write me a 1 page executive summary. 

H h h ld I f th it f thi• How much should I pay for the equity of this  company?

• How did you come up with that number?

• This is the most important part of the report!!

• Then write a short report, which includes all 

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calculations tables etc. 

• Everything has to be in a single word file. Shorter the  better. 

Will I help you?

• A little may be .

• I have in class meeting with every group in  couple weeks. 

• Prepare your questions in advance. 

• I may not be able to answer every question  but I will try to provide guidance

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but I will try to provide guidance.

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How is your success in the mission is going  to be evaluated

• Teamwork is very important for the success • Therefore each team member will grade the  performance of others – You will report if someone did less than or more than  his/her share. I will adjust the final grade from the  project based on your inputs about the team  members. This is called 360 degree evaluation.  Designed to prevent free riders and reward the hard 

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working members

• I will also decide whether to buy shares or  not based on your report. So I really care  about your recommendation !!