eBay Inc. 1
eBay Inc. 2
TABLE OF CONTENTS
TABLE OF CONTENTS…………………………………………………………………….…..1
• A BRIEF HISTORY AND BACKROUND OF EBAY...………………………………......2
• MISSION STATEMENT…………………………………………………………………….2
• TRADING PLATFORM…………………………………………………………………….2
• BOARD OF DIRECTORS…………………………………………………………………..3
• OWNERSHIP INFORMATION…………………………………………………………....4
• FINANCIAL RATIOS/CHARTS AND GRAPHS…………………………………………5
• HOLDING PERIOD RETURN……………………………………………………………..14
• FREE CASH FLOW/EQUITY……………………………………………………………...15
• MARKET EFFICIENCY……………………………………………………………...…….17
• RISK ANALYSIS………………………………………………………………………….....20
• COST OF EQUITY…………………………………………………………………….…….21
• COST OF CAPITAL………………………………………………………………….……...21
• CAPITAL STRUCTURE…………………………………………………………………….22
• M&M PROPOSITION CHART………………………………………...…………………..23
• STRENGTH AND WEAKNESSES…………..……………………………………………..24
• FIVE YEAR STOCK PRICE……………………………………………………………......25
• ANALYST RATINGS…………..……………………………………………………………26
• HOLD/SELL/BUY RECOMMENDATION…….………………………………………….27
FINANCIAL STATEMENTS REFERENCES………………………………………………0000
MSN MONEY REFERENCES
eBay Inc. 3
eBay Inc. was formed as a sole proprietorship in September 1995 and was incorporated in
California in May 1996. In April 1998, eBay reincorporated in Delaware and in September 1998
we completed the initial public offering of their common stock. Their principal executive offices
are located at 2145 Hamilton Avenue, San Jose, California, 95125.
eBay’s mission is to build the world’s most efficient and abundant marketplace in which
anyone, anywhere, can buy or sell practically anything. They pioneered online trading by
developing an Internet-based marketplace in which a community of buyers and sellers are
brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and sell an
enormous variety of items. Through their PayPal platform, they enable any business or
consumer with email to send and receive online payments securely, conveniently and cost-
eBay’s marketplace exists as an online trading platform that enables a global community of
buyers and sellers to interact and trade with one another. Their role is to create, maintain, and
expand the technological functionality, safety, ease-of-use, and reliability of our trading platform
while, at the same time, supporting the growth and success of our community of users.
eBay’s Trading Platform
eBay’s trading platform is a fully automated, topically arranged, intuitive and easy-to-use
online service that is available 24-hours a day, seven-days a week, enabling sellers to list items
for sale in either auction or fixed-price formats, buyers to bid for and purchase items of interest,
and all eBay users to browse through listed items from any place in the world at any time. The
platform includes software tools and services, available either for no charge or for a fee, that
allow buyers and sellers to more easily trade with one another. Our software tools and
services — such as Turbo Lister, Seller’s Assistant, Selling Manager and Selling Manager Pro,
which help automate the selling process; the Shipping Calculator, which makes it easier for
buyers and sellers to calculate shipping costs; the eBay Toolbar, which helps eBay users stay
connected with eBay wherever they are on the Internet; and PayPal, which facilitates the online
exchange of funds — are all designed to make the trading process easier and more efficient.
eBay Inc. 5
Pierre M. Omidyar 36 Founder, Chairman of the Board and
Margaret C. 47 President, Chief Executive Officer and
Martin L. Abbott 36 Senior Vice President, Technology
Matthew J. 39 Senior Vice President and General
Bannick Manager, Global Online Payments
William C. Cobb 47 Senior Vice President and General
Manager, eBay International
Rajiv Dutta 42 Senior Vice President and Chief Financial
Michael R. 49 Senior Vice President, Legal Affairs,
Jacobson General Counsel and Secretary
Jeffrey D. Jordan 45 Senior Vice President, eBay North
Lynn M. Reedy 48 Senior Vice President, Product,
Development and Architecture
Maynard G. 48 Chief Operating Officer
Fred D. 59 Director
Philippe 56 Director
Scott D. Cook 51 Director
Robert C. Kagle 48 Director
Dawn G. Lepore 49 Director
Thomas J. 49 Director
eBay Inc. 6
There is no relationship, as defined, between any of the above executive officers. Each of the above
Name of Beneficial Owner Number Percent
Pierre M. Omidyar(2) 114,525,88
4 17.5 %
Jeffrey S. Skoll(3)
Margaret C. Whitman(4)
Maynard G. Webb, Jr.(5)
Jeffrey D. Jordan(6)
Matthew J. Bannick(7)
William C. Cobb(8)
Fred D. Anderson(9)
Scott D. Cook(11)
Robert C. Kagle(12)
Dawn G. Lepore(13)
Thomas J. Tierney(14)
All directors and executive officers as a group (16 persons) 137,060,55
(15) 9 21.0
eBay Inc. 7
FINANCIAL RATIOS ANALYSIS
Growth Rates % Company Industry S&P 500
Sales (Qtr vs year ago qtr) 58.70 27.80 11.20
EPS (YTD vs YTD) 92.10 NA 31.20
EPS (Qtr vs year ago qtr) 92.10 NA 31.20
Sales (5-Year Annual Avg.) 82.55 16.51 5.12
EPS (5-Year Annual Avg.) 109.17 NA -3.24
Dividends (5-Year Annual Avg.) NA NA 1.71
Financial data in U.S. dollars
Growth Rates are used to measure future growth of the firm. Growth is measured with Sales,
EPS, and Dividends. Compound annual growth rate for the number of full fiscal years shown. If
there is a negative or zero value for the first or last year, the growth is not meaningful. Investors
need to know how much products or services a company sells, and how much of the profit is
retained and used to grow its business or return to shareholders. The higher the retained
earnings and dividends, the better. In general, eBay has higher growth rates then both the
industry and the S&P 500.
Growth in sales shows how much more goods and services a company has sold compared to
last year. This is important information because it shows if the company has improved its
goods/services or if they are more aggressively marketing their goods/services. eBay’s has a
very high sales growth rate of 58.70 which is more then double the industry and more then 5
times that of the S&P 500. Sales growth percentage is Excellent.
Earnings per share is the amount of retained earnings divided by the total number of shares
outstanding. The higher the EPS, the higher the retained earnings over shares outstanding.
eBay has a very high EPS (YTD vs. YTD) of 92.10 compared to the S&P 500 of 31.20 which is
almost triple. eBay’s EPS is Excellent.
eBay does not give dividends. This could signal that eBay is a very high growth company
because eBay uses its retained earnings to reinvest into the company.
Looking at sales, EPS, and dividends, eBay is a very high growth company with Excellent
eBay Inc. 8
Price Ratios Company Industry S&P 500
Current P/E Ratio 82.1 NA 21.3
P/E Ratio 5-Year High NA NA 64.8
P/E Ratio 5-Year Low 49.6 NA 16.5
Price/Sales Ratio 19.12 4.73 1.49
Price/Book Value 9.67 5.64 2.91
Price/Cash Flow Ratio 71.60 89.90 12.70
Financial data in U.S. dollars
Price ratios conclude a company’s standing value to the entire market place and can determine
the risk of a company and the potential growth of its earnings.
A company's P/E ratio is computed by dividing the current market price of one share of a
company's stock by that company's per-share earnings. The higher the P/E ratio, the higher the
expectation that earnings will continue to grow at a rapid pace. eBay’s P/E ratio of 82.1 is
almost 4 times the S&P 500 P/E ratio of 21.3. eBay’s P/E ratio is Excellent.
Price/Sales Ratio is the relationship of a company's stock price to its revenues per share.
Usually investors will look for a lower Price/Sales ratio. This is because the lower the
Price/Sales ratio, the more value you will get for your money. eBay has a Price/Sales ratio of
19.12, this means you have to spend $19.12 to buy $1.00 worth of sales. This is less value for
your money when compared to the industry and the S&P 500 because the industry’s Price/Sales
ratio is 4.73 and the S&P 500 sales/price ratio is 1.49. eBay’s Price/Sales ratio is Poor.
Price/Cash Flow Ratio is the closing price divided by cash flow per share from the last 12
months. The higher the Price/Cash Flow Ratio, the more free cash the company has to spend
either in investing in projects, paying dividends, or covering debts. Although eBay’s Price/Cash
Flow Ratio of 71.6 is higher then the S&P 500 of 12.7, it is lower then the industry’s Price/Cash
Flow Ratio of 89.9. eBay’s Price/Cash Flow Ratio is considered Fair.
Based on the price ratios, eBay is a company that has moderate risk, but has very high growth
Profit Margins % Company Industry S&P 500
eBay Inc. 9
Gross Margin 87.8 54.3 48.0
Pre-Tax Margin 29.3 1.2 10.9
Net Profit Margin 23.7 -1.9 7.2
5Yr Gross Margin (5-Year Avg.) 86.9 53.2 47.5
5Yr PreTax Margin (5-Year Avg.) 27.6 -66.6 9.2
5Yr Net Profit Margin (5-Year Avg.) 17.7 -66.7 5.6
Financial data in U.S. dollars
Profit margins are a measure of how well a company manages their costs.
Investors prefer companies that increase profit margins -- the percentage of sales that they keep
-- every year. This is accomplished either by lowering expenses or raising prices. Companies
consistently find ways to squeeze more profits out of sales than their competitors.
Gross Margin is a broad measure of how much money eBay is making after COGS (costs of
goods sold). eBay’s Gross Margin is significantly higher than both the industry and the S&P
500. In fact it is roughly double that of S&P 500 (87.8% vs. 48%). It would be fair to say eBay’s
Gross Margin is Excellent.
Net Profit Margin is a measure of eBay’s profit after all costs. As indicated by the chart above
eBay is still profiting while the industry is in the red. The S&P 500 has a Net Profit Margin of
7.2% and eBay surpasses that number easily with 23.7%. eBay’s Net Profit Margin is
eBay’s Profit Margins show that it managing is cost very well, much better so than the industry
and S&P 500. Overall EBay’s profit margin is Excellent.
Financial Condition Company Industry S&P 500
Debt/Equity Ratio 0.00 0.22 1.23
Current Ratio 2.8 2.4 1.5
eBay Inc. 10
Quick Ratio 2.4 2.2 1.0
Interest Coverage 119.9 2.0 3.3
Leverage Ratio 1.2 1.7 6.0
Book Value/Share 8.15 3.03 11.77
Financial data in U.S. dollars
Financial Condition shows how eBay handles debt and equity, and also current assets and
The Debt/Equity ratio shows that eBay has very little debt. When the ratio is equal to 1 it means
a company owes as much as it owns. Thus, a lower Debt/Equity ratio is preferred. eBay’s ratio
of 0 is quite a bit lower than both the industry and S&P 500. eBay’s Debt/Equity Ratio is
The Current Ratio shows how easily a company can cover its liabilities with its assets. eBay’s
Current Ratio of 2.8 is above the industry standard of 2.4 and well above the S&P 500 standard
of 1.5. eBay’s Financial Condition is GOOD.
Overall eBay’s financial condition is Strong.
Investment Returns % Company Industry S&P 500
Return On Equity 12.0 NA 14.2
Return On Assets 9.9 -1.3 2.4
Return On Capital 12.0 -1.8 6.3
Return On Equity (5-Year Avg.) 7.2 NA 12.1
eBay Inc. 11
Return On Assets (5-Year Avg.) 6.1 -30.2 2.0
Return On Capital (5-Year Avg.) 7.1 -42.3 5.7
Financial data in U.S. dollars
Return on Equity measures the return, expressed as a percentage, earned on a company's
common stock investment for a specific period. The figure shows investors how well their
money is being used by managers. This is calculated by taking Earnings after Taxes and
dividing it by Shareholder’s Equity. eBay’s ROE is slightly lower than the S&P 500. eBay’s
Return on Equity is Below Average.
Return on Assets is calculated taking EAT and dividing it by Total Assets. This shows how
much a company makes vs. how much put into it. eBay’s ROA of 9.9 is enormously higher than
the negative 1.3 of the industry. It is almost 4 times that of the ROA of S&P 500. eBay’s ROA(5
Yr Avg) is quite a larger percentage higher than that of the industry’s which is a huge –30.2.
eBay’s Return on Assets is Excellent.
Overall EBay’s investment return ratio is FAIR
Management Efficiency Company Industry S&P 500
Income/Employee 113,000 -6,000 23,000
Revenue/Employee 475,000 310,000 315,000
Receivable Turnover 8.9 10.5 7.1
Inventory Turnover NA 25.3 7.9
eBay Inc. 12
Asset Turnover 0.5 0.7 0.4
Financial data in U.S. dollars
Management efficiency shows how well a company manages its assets and how productive its
management staff is.
The Revenue/Employee ratio shows much money each employee earns for the company.
eBay’s ratio of 475,000 is greatly higher than both the industry and S&P 500. It shows that the
management of eBay is more proficient at making its employees productive. eBay’s
Revenue/Employee Ratio is Good.
The Asset Turnover Ratio measure the efficiency of the usage of assets to generate sales. It is
calculated by taking Sales over Total Assets. eBay’s Asset Turnover Ratio is lower than the
industry by .2 times but is higher than S&P 500 by .1 times. eBay’s Asset Turnover Ratio is
Overall EBay’s management efficiency is Average.
eBay primarily makes its money from listing, feature and final value fees collected from
registered users who use an eBay site to auction and trade their goods such as antiques and
art, books, business & industrial, cars & other vehicles, clothing & accessories, coins,
collectibles, crafts, dolls & bears, electronics & computers, home furnishings, jewelry & watches,
movies & DVDs, music, musical instruments, pottery & glass, real estate, sporting goods &
memorabilia, stamps, tickets, toys & hobbies and travel.
eBay Inc. 13
REVENUE BY PRODUCT CATEGORIES
MO TO RS
SPO RTS CO MPUTERS
MO VIES/MUSICS C O NSUMERS/ELEC TR
8% CLO THING/ACCESSO O NICS
REVENUE BY CATEGORIES
MOTORS: $627.9 MOVIES/MUSICS: $173.2 TOYS: $108.5
COMPUTERS: $194.9 SPORTS: $151.5 JEWELRY: $108.5
ELECTRONICS: $194.9 COLLECTIBLES: $129.9 CAMERAS: $86.6
CLOTH/ ASSESSORIES: $173.2 HOME/GARDENS: $129.9 INDUSTRIAL: $86.6
eBay’s revenue comes from different categories as listed above; however, the major sources of its revenue are
from : motors 29% ( $627.9 mil ), computers 9% ( $194.9 mil ), electronics 9% ( $ 194.9 ), cloth/accessories 8% (
$173.2 mil ), and movies/music 8% ( 173.2 mil ).
eBay Inc. 14
INDUSTRY COMPARISON OF RETAIL SPECIALTY MARKETS
DOLLARS (millions) $30,000.00
EBAY AMAZON COSTCO STAPLES BED BATH
eBay has the largest capital market in the industry. The company has a market capital of $52 billion compared to
its competitors Amazon with $19 billion, Costco with $18 billion, Staples with $13 billion, and Bed Bath &
Beyond with $10 billion.
eBay Inc. 15
INDUSTRY COMPARISON OF RETAIL SPECIALTY MARKETS
BED BATH AND BEYOND
Last Trade: 82.33 Day's Range: 77.92 - 79.37
Trade Time: Jul 07 52wk Range: 49.87 - 94.13
Change: 1.14 (1.43%) Volume: 6,410,703
Prev Close: 79.47 Avg Vol (3m): 8,776,227
Open: 79.29 Market Cap: 51.49B
Bid: 46.61 x 100 P/E (ttm): 82.11
Ask: 110.29 x 100 EPS (ttm): 0.954
Div & Yield: N/A
eBay Inc. 16
HOLDING PERIOD RETURN
(12/31) 2003 2002 2001 2000
. HPR = Ending Price – Beginning Price + Distributions 0.3775 0.9053 0.0138 0.0136
Earnings growth rate estimate
Dividend 0 0 0 0 0
Price 86.71 64.61 33.91 33.45 33
HPR 0.3421 0.9053 0.0138 0.0136
34.21% 90.53% 1.38% 1.36%
The holding period return for eBay was calculated by taking the historical prices for ending 2000,
2001, 2002, and 2003 from:http://finance.yahoo.com/q/hp?
The year 2000, 2001, and 2002 ending prices were adjusted closing prices due to a 3-to-1 stock
split in March 02, 1999, and a 2-to-1 stock split in May 25, 2000. The Holding Period Return is
positive for the year 2001 through 2003. This means that investors who invested in EBAY has
had a positive return on their investment for those years. EBAY is a relatively new company
whose stock went public in September of 1998. For the first few years EBAY had a low HPR.
For the year 2001 and 2002 eBay’s HPR was close to 1.4% and in 2003 its HPR rose sharply to
90.53%. This could be due to the fact that EBAY had many ongoing projects that unexpectedly
had high payoffs. Considering the fact that sharp rise in 2003 was unexpected, EBAY is still a
very high growth company and its estimated earnings growth rate estimate for 2004 is 59.06%.
The HPR for 2004 is expected to be 34.21%. This is based on the assumption that the price of
EBAY stock will reach $86.71 per share on Dec. 31, 2004. This estimate is based on the mean
price target of market analysts shown in the chart below:
PRICE TARGET SUMMARY
Mean Target: 86.71
Median Target: 86.5
High Target: 105
Low Target: 68
No. of Brokers: 14
eBay Inc. 17
FREE CASH FLOW TO EQUITY
2.Free Cash Flow and Cost of
2004 2003 2002 2001 2000
NI 441,771 249,891 90,448 48,294
n 159,003 76,576 86,641 38,050
Expenditures 581,751 161,907 166,323 49,753
(-)∆ in working
capital 416,372 378,568 165,644 165,756
(+) ∆ in long-
term debt 110,678 1,790 604 -3,614
FCFE -177,363 -286,671 -212,218 -154,274 -132,779
(Thousand) (Thousand) (Thousand) (Thousand) )
Expenditures 581,751 161,907 166,323 49,753
Additions to property, plant, and
equipment 581,751 198,081 169,150 49,753
(-) Disposition of property and
equipment 0 36,174 2,827 0
∆ in working capital = [(CA 02)-
(CA01)]-[(CL02)-(CL01)] 416,372 378,568 165,644 165,756
CA 2,145,882 1,468,458 883805 675,464 465,307
CL 647,276 386,224 180,139 137,442 93,041
∆ in long-term debt =LTD02-
LTD01 110,678 1,790 604 -3,614
LTD 124,476 13,798 12,008 11,404 15,018
.Ke(Discounted cash flow (DCF) model) 2004(7/15) 2003 2002 2001 2000
P0=(FCFE1/Shares0)/(Ke0-G1) 12/31/2004 -177,363,107 -286,671,000 -212,218,000 -154,274,000
+G1 outstanding 657,400,000 649,293,000 311,277,000 277,259,000
G1=(FCFE1-FCFE0)/FCFE0 12/31/2004 0.5906 -0.3508 -0.3756 -0.1619
7/15/2004 83.46 64.61 33.91 33.45
equity) 0.5885 0.5797 -0.3780 -0.3985
eBay Inc. 18
The figures used in the calculation of Free Cash Flow to Equity such as Net Income, Capital
Expenditures, Long-term Debt, and Depreciation were taken from eBay’s 2003 and 2002 10-K
report. Please note that EBAY lists their Long-Term Debt and “Long-Term Obligations” in their
10-K report. The numbers were then plugged into the formulas that are stated in the above
table to compute eBay’s Free Cash Flow to Equity. The cash flow for 2001 was -132,779, for
2002 -154,274, for 2003 -212,218, for 2004 -117,363, all numbers are in thousands. Our
calculations came up with negative FCFE for the years 2000 through 2003, this is due to very
large capital expenditures that eBay invested their cash into. Even though eBay’s Net Income
increased each year, so did their capital expenditures. The cash flows for 2000-2003 were all
negative, but the estimated growth rate for 2004 was positive. The FCFE for 2004 was still
negative, but it is less then the FCFE for 2003.
We then took the FCFE of EBAY and plugged it into the Discounted Cash Flow (DCF) model.
Due to the face that the free cash flow to equity was negative, our calculations gave us negative
ke for the years 2000-2003. This is not feasible because investors would not require a negative
eBay Inc. 19
eBay Inc. Announces Online Directory of Software and Services to Support Trading on the
World's Online Marketplace --June 23, 2004
At the eBay Developers Conference in New Orleans on June 23, 2004, eBay (NASDAQ: EBAY)
announced the eBay Solutions Directory, a new online directory of software and services that supports
trading activity on the World's Online Marketplace. The new Solutions Directory gives eBay developers
online destination to promote software and services that make it easier to buy and sell on eBay. The
Solutions Directory and its features are the result of extensive feedback from the eBay community of users
and third-party developers. The directory provides a reliable, one-stop showcase for the wide range of
software and services provided by third-party members of the eBay Developers Program. It is available
today at http://solutions.ebay.com
The eBay Solutions Directory helps buyers and sellers find software and solution providers that
can improve their productivity and make their experience more enjoyable and effective on eBay.
There are currently hundreds of third-party software solutions offered by members of the eBay
Developers Program, many of which are expected to be listed in the directory. The directory
categorizes solutions by feature and includes search, browse and sort capabilities making it
easy for eBay users to comparison-shop among solutions and services.
All members of the eBay Developers Program with commercial application programming
interface (API) licenses are eligible to list their solutions in the directory, which provides an
effective way to reach the eBay Community, and will help generate awareness and revenue for
The eBay Developers Program enables third-party developers to create innovative solutions that
tap into the power of eBay, The World's Online Marketplace. Members of the program gain
access to eBay's platform and technical resources to create a wide variety of solutions to meet
the diverse needs of the nearly 105 million buyers and sellers on eBay.
eBay Inc. 20
Based on the chart of eBay, eBay’s announcement of online directory of software and services did not
affect the eBay stock price. The chart clearly indicates that this market is a Weak-Form Market due
to the fact that since the 20th of June, 2004, the stock price of eBay has continually risen until even after
the announcement date of June 23, 2004, where it continues to rise even higher.
eBay Inc. 21
OPEC Confirms Oil Production Increase
--June 3, 2004
The Organization of Petroleum Exporting Countries, or OPEC, has confirmed plans to again increase its
daily oil production to help fight rising oil prices. In an effort to lower crude prices from the $40-a-barrel
range, the OPEC announced Thursday, June 3, 2004 that would increase oil output by 2 million barrels a
day, to 25.5 million barrels. The production increase, the biggest in six years, takes effect July 1. OPEC
will raise the group's quotas by 2 million barrels a day in July and another 500,000 barrels a day in
The graph indicates that OPEC’s announcement slightly increased eBay’s stock price for 5 days. On the
event date June 3rd, eBay’s stock price closed at $87.60. OPEC’s announcement increased eBay’s stock
price by $1.40, closing at $89 on June 8th. EBay’s stock graph also indicates a No-Form Market. In
conclusion, the increase of oil output announcement probably increased the amount of car sales eBay
incurred during that period. However, the increase in oil output did not affect eBay’s stock price as
dramatically as it would affect the automobile and airline industries.
eBay Inc. 22
2004 2003 2002 2001 2000
4. Risk Analysis: Beta eBay 1.5877 1.7072 2.7586 3.3931
Beta= COV(RIBM, RS&P500)/VAR(RS&P500)
2003 2002 2001
Unlevered Beta 1.51116863 2.5397764 3.116313646
[Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unlevered
Equity 4,896,242 3,556,473 1,429,138.00
Debt 923,892 483,753 249,391.00
Income from continuing operations before
income taxes 661,500 398,133 162,943.00
Provision for income tax 206,738 145,946 80,009.00
Tax rate 0.3125 0.3666 0.49
2004(5/31) 2003 2002 2001 2000
.Ke (CAPM) Rf 0.0125 0.0102 0.0163 0.0386
Ke= Rf + Beta(Rm-Rf) Rm-Rf 0.0185 0.3206 -0.2261 -0.1511
Beta 1.5877 1.7072 2.7586 3.3931
Ke(required return on
equity) 0.0419 0.5575 -0.6074 -0.4741
The company is currently underpriced because Ke( DCF model) > Ke(CAPM); 0.5823>0.0419
The Beta for eBay Inc. was calculated by taking the covariance of eBay and the S&P 500 Index
and then dividing that number by the variance of the S&P 500 Index. The Beta was highest in
2001 and drops each subsequent year. The reason for such a high Beta in 2001 is because
eBay is a relatively young company. As eBay matured its Beta dropped along with the increase
of eBay’s assets. Unlevered Beta was computed by the formula listed under the term Unlevered
Beta. Equity, debt, income from continuing operations before income taxes, provision for
income tax, and the company’s tax rate were taken from the 10-K file. Unlevered Beta mirrors
Beta by dropping each subsequent year.. ke was calculated using the Capital Asset Pricing
Model. Again the formula is listed under k e (CAPM). There is a negative ke for 2001 and 2002.
This is not realistic because how can anyone want a negative k e. Thus both the CAPM and DCF
model would not be used to calculate ke. The company is currently underpriced because
ke(DCF model) of 0.5823 is greater than ke(CAPM model) of 0.0419.
COST OF EQUITY
eBay Inc. 23
In determining a value for cost of equity (ke), we examined a number of different parameters. As
stated previously, the Discounted Cash Flow, CAPM model yielded a negative ke and is
therefore unreasonable. eBay does not pay, so the Dividend model also can’t be used.
Because three of these models failed, therefore we have to look at different sources to adjust ke.
Because in eBay 10-K file does not provide enough information, that’s why analyzed the cost of
debt (kd).using interest divide total long term debt to calculate k d The kd for the company was
highest in 2003 and lowest in 2001. Due to the fact that a company with a higher k d and more
debt carries more risk, it is reasonable to assume that ke should mirror these figures.
So, by examining net income, interest expense, k d, and the 10-K file, we were able to make an
estimate of ke. We assumed that ke2001 is 9%, ke2002 is 15%, and ke2003 is 24%.
COST OF CAPITAL
5. Cost of Capital and Optimal Capital Structure: 2003 2002 2001
We= Equity/(Equity+Debt+Preferred Stock) 0.8413 0.8803 0.8514
Wd=Debt/(Equity+Debt+Preferred Stock) 0.1587 0.1197 0.1486
Stock) 0.0000 0.0000 0.0000
Ke 0.2400 0.1500 0.0900
Kd 0.2347 0.1081 0.0347
Kp 0.0000 0.0000 0.0000
WACC=We*Ke + Wd*kd*(1-T)+ Wp*Kp WACC 0.2278 0.1402 0.0792
The equations and formulas below were used to calculate the cost of capital.
WACC= We*Ke +Wd*Kd( 1 – T) +Wp*Kp
We= Equity/(Equity +Debts + Preferred Stock)
Wd= Debts/(Equity +Debts + Preferred Stock)
Since eBay has not issued any preferred stock, Wp*Kp equals to zero. The Capital Structure of
the Company is the sum of the value of the firm’s debts and its equity. The goal of the Optimal
Capital Structure is to maximize the value of the firm and to minimize the firm’s weighted Cost of
WACC is increasing for the years 2001, 2002, and 2003 ranging from 7.92% to 22.78%.
Because based on eBay long term investment project, eBay get higher profit on every year
that’s why eBay’s WACC keep increasing.
eBay Inc. 24
2001 Capital Structure 2002 Capital Structure
2003 Capital Sructure Industry Capital Structure
eBay’s debts have decreased from 14.68% in 2001 to 11.97% in 2002, and increased to 15.87%
in 2003. eBay’s debt is $249391 thousand and increased up to $923892 thousand in term of
long-term debt. With the debts increased, the equity also increased from 2001 to 2003, with the
debt increased from 2001 through 2003 but not much about 1%, which show that the company’s
equity is still stable. And by comparing with Industry’s debt capital structure eBay’s debt is much
lower than Industry’s debt, so the eBay’s debt position is still very good.
eBay Inc. 25
M&M PROPOSITION CHART
eBay Capital Structure
0.1 0.12 0.14 0.16 0.18
In year 2001 total assets of eBay consists of 85% equity and 15% debt.
In year 2002 total assets of eBay consists of 88% equity and 12% debt.
In year 2003 total assets of eBay consists of 84% equity and 16% debt.
The capital structure of eBay’s debt to equity ratios has remained relatively stable over the past
few years, showing a consistent use of debt financing. Using the three years of data to calculate the
weighted average cost of capital (WACC), the figures have shown no significant change.
In relation to M&M proposition, the WACC from 2001 to 2003 has shown a mode. Which is
similar to (model 3) MM with tax, which includes bankruptcy and agency cost. Model 3 is the more
realistic model in which a firm’s capital structure contains both debt and equity. Based only on 3 years
eBay’s WACC computes for an Optimal Capital Structures at 0.1486. However, it is not a sufficient
Optimal Capital Structure.
eBay Inc. 26
STRENGTHS AND WEAKNESSES
eBay INC. was one of the premier online auction sites. Since it went public in Sept. of 1998,
eBay has experienced very high growth and expansion of the services offered. eBay is a
company that has very low debt and uses a high equity capital structure. This could be the
reason that eBay has survived the internet bubble from the years 1999-2001. During this time
many other internet companies or dot coms went out of business, but eBay still managed to turn
Looking at eBay’s financial ratios, eBay’s main strengths lie in high growth, very low debt, and
high profit margins. After analyzing eBay’s growth rates, we has assessed that eBay is an
extremely high growth company. Also eBay has very high before and after-tax profit margins.
This is due to the fact that eBay is an internet company that offers an online service. This gives
them the freedom to go into different areas of auctions with very little cost. For example eBay
added an eBay motors section to their auction site and was hugely successful and now provides
29% of their revenues. eBay has a debt to equity ratio of 0 which means eBay has very little
debt compared to the amount of equity. This shows that eBay has a very strong financial
condition. eBay has a very high profit margin because they have low operating costs which
means they can generate more profits.
The weakness of eBay includes a poor return on equity and negative free cash flow to equity.
This might turn investors away. This could indicate that eBay in trying to focus on growth and
expansion. The beta for eBay has decreased each year. The beta was relatively high in 2001
due to the fact that eBay was a young company and as they gained financial stability the beta
has decreased to a fairly low beta of 1.59 from their beta of 3.3 in 2001.
Overall eBay is a very financially stable and high growth company that has many strengths
compared to very few weaknesses.
eBay Inc. 27
5 YEAR STOCK PRICE CHART
eBay’s stock price was pretty steady when it first became public. The economy became bad
around 2000 and eBay’s stock price fell accordingly. At the end of 2002 eBay’s stock price
made a recovery and began skyrocketing upward from around $27 to about a peak of $92.
eBay Inc. 28
eBAY: ANALYSTS RATINGS
Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago
Strong Buy 9 9 9 10
Moderate Buy 1 2 2 2
Hold 8 6 6 5
Moderate Sell 0 0 0 0
Strong Sell 1 1 1 1
The graphs suggest that investors buy eBay stock. Currently there are 9 analysts that
recommend a strong buy and 1 analyst that recommends a moderate buy for potential investors.
This would suggest that eBay stock is undervalued based on their estimated future earnings.
The expert analysts recommend that current shareholders hold their stocks and/or purchase
more because the value of the stock is expected to increase. There is one analyst that
recommends a strong sell.
eBay Inc. 29
BUY, SELL, OR HOLD?
We recommend that investors BUY shares of eBay common stock
It is apparent from our analysis of the financial ratios that eBay has high expected growth. The
financial ratios show that the debt to equity ratio is 0 which means that the firm has very little
debt. This is good because that means the company has a mostly equity based capital
structure. Also eBay has very high sales and very high profit margins compared to the industry
and the S&P 500. This means that eBay makes more money then their competitors.
From our calculations of the Discount Cash flow Model, we yielded a Ke of about .5885 which is
higher then the CAPM model ke of about .419. This shows that eBay stock is underpriced. This
is an indicator to buy eBay stock because the stock price should increase and investors
purchase more and more eBay stock.
The HPR of eBay has been positive for the past 3 years even through difficult economical
situations. The earnings growth estimate for 2004 is about 59 percent. This further supports
that eBay will continue to grow and increase value for its shareholders.
eBay has endured the internet bubble from 1999-2001 and while many other companies went
under, eBay survived and has had huge expansion and growth in both aspects of growth in
sales and revenues and expansions of operations into different areas on online auctions. The
majority of expert analysts recommend a strong buy. Only one recommended a strong sell.