1. YouTube Case Study
Question: Is YouTube likely to earn its cost of equity?
Answer: Depends on the credibility of the assumptions underlying the forecast
Test: NPV = PVFCFE – I ≥ 0, Implies PVFCFE must be ≥ $1.65 billion (Purchase Price)

2. YouTube Case Study: Estimating Base Year Cash Flow
(Revenue/Month)YouTube = (Revenue/Unique
Visitor/Month)About.com x
YouTube Unique Visitors/Month
= $.15 x 34 million
= $5.1 million
(Net Income/Month)YouTube = (Revenue/Month)YouTube x Google net profit margin
= $5.1 million x .25
= $1.28 million
3. Assuming depreciation equal capital spending and Δworking capital zero, then base year free cash flow to equity (FCFE) is
FCFEFullYear = (Net Income/Month)YouTube x 12
= $1.28 million x 12
= $15.4 million

3. Underlying Assumptions
To realize a PVFCFE ≥ $1.65 billion if discounted at 10%, we have to assume
Base year FCFE would have to grow at least 225 percent annually for the next 15 years
FCFE would grow at 5 percent annually during the terminal period
Results:
PVTV = $1,005 million
Total PV = $1,610 million
PV15yrs = $ million

4. Sensitivity Analysis
Assuming a higher revenue per unique visitor figure would result in a lower projected rate of growth of free cash flow to equity
However, assuming YouTube’s cost of equity is the same as Google’s may be optimistic. A higher discount rate to reflect YouTube’s probable higher level of risk would offset assumed higher revenue per unique visitor figure.