2. Group Profile
2
Serial No. Name MBA ID
1. Sheikh Saifullah Khalid 23-2027
2. Nusrat Jahan 23-2009
3. Md. Ullash Hossen 23-2227
Group-62
3. About Square Inc.
3
• Twitter co-founder Jack Dorsey's latest venture was Square, Inc.
• It was established in 2009
• Square charged 2.75% of the transaction amount for Square Invoices and
3.5% plus $0.15 for manual payments..
• Square sellers processed over $32 billion of GPV in the year ended
September 2015.
• 638 million card transactions generated 180 million card payments.
8. SWOT Analysis
8
S
Strengths
W
Weaknesses
O
Opportunities
T
Threats
Strengths
It has Frequent demand
Fraud detection features and
powerful analytics
Extensive array of services;
.
Opportunities
• New innovations
• Opportunity of expansion.
Weakness
Lower Lack of scale compared to
peers
High regulation on operation
Reporting loss consistently
Threats
Negative Profit Margin
Invest in R&D is uncertain
Highly competitive
Increasing market competition
High level rules and regulations
10. Business Risk Analysis of Square Inc.
10
Mean Sales 535358.00
Standard Deviation 264307.64
CV 2.03
Business risk is high cause sales variability is 2.03 (>0.5). We will be using
3.2% business risk premium, moreover this is a tech company
Average Degree of Leverage = 0.47
11. Financial Risk Analysis of Square Inc.
11
Particulars 2013 2014 2015
EBIT -85,361 -104,942 -150,491
Interest Expense - 12 -
Degree Financial leverage 1.00
Average DFL 1.00
TIE -8745.17
Historically Company does not bear any financial risk. Because company generally did not use any debt.
Historically its risk is very low
12. Altman Z Score
12
Weight
2013 2014
Working Capital/Total
Assets 1.2
-0.33 -0.28
Retained Earnings/Total
Assets 1.4
0.15 0.09
EBIT/Total Assets 3.3 1.74 1.57
MVE /BVLD 0.6
6.17 9.12
Sales/Total Assets 1 -0.76 -0.73
Altman Z SCORE 3.46 5.21
Average Z Score 4.33
Z > 2.9 Safe Zone
1.81 < Z < 2.99 Gray Zone
Z < 1.81 Distress Zone
Company is belonging in safe zone
14. Problem Statement
▸ IPO issue at lower
than estimate price
($9 VS $13)
14
▸ $520 million private
capital raise between
2009 and 2014
Comparing issue price with calculated fair value to
measure IPO success
15. Valuation Methods Considered
15
Option 01 Free cash flow (pre-money) , 297 million shares
Option 02 Free cash flow (post-money), 27 million new shares issue
Option 03 Residual valuation Method
Option 04 Multiple valuation: EV/EBITDA & EV/EBIT
16. Valuation Assumptions
▸ Transaction revenue increase 15%
▸ Starbucks transaction revenue increase 40%
▸ Hardware revenue increase 33%
▸ Transaction cost 50% of net sales and will decrease at
0.75% rate
▸ CAPEX 15% of incremental revenue
▸ NWC investment 10% of incremental sales
▸ Terminal growth rate 4%
▸ Tax rate 30%
16
17. Cost of Capital
17
*No interest-bearing debt was stated in the balance sheet of 2015
Risk free rate 3.00%
Beta 1.2
Equity Risk Premium 4%
WACC for Basic Valuation
Cost of Equity 7.8000%
Base WACC 7.80%
Business risk premium 3.20%
Financial risk premium 0.00%
Risk adjusted WACC 11.00%
18. Free Cash Flow Valuation: Pre-money
18
PV of FCFF $3,611,269.30
Add: Cash equivalent balance $174083
Value of the Firm $3,785,352.30
Less: Value of Preferred share $51,494
Value of the Equity $3,733,858
Total Number of Shares (in million) 297
Value per share $12.56
19. Analysis of Basic Valuation (Simulation)
19
Coefficients of
variations
0.506 (Risky)
20. Free Cash Flow Valuation: Post-Money
20
*New 27 million share issue
PV of FCFF $5,115,883.60
Add: Cash equivalent balance $174,083
Value of the Firm $5,289,966.60
Less: Value of Preferred share $51,494
Add: Real option value $283.32
Value of the Equity(in million) 5,238,756
Total Number of Shares (in mn) 322
Value per share $16.22
21. Analysis of Post-money Valuation (Simulation)
21
Coefficients of
variations
0.372 (Less risky)
22. Residual Income Valuation
22
▸ Value per share $18.27
▸ Discount rate 11%
▸ Payout ratio 0%
Coefficients of
variations
1.78 (Highly volatile)
