1. In April 2003, analysts at Morgan Stanley and Prudential had set 12-month target prices of $106 and $108 for the firm eBay. At that time, eBay’s stock price was $89.22 and the consensus forecast for eBay EPS was $1.45. Subsequently, eBay split its stock two-for-one. Its actual EPS truned out to be $0.82, (postsplit, corresponding to $1.64 on a presplit basis). On April 30,2004, eBay’s stock price closed above $82 ($1.64 on a presplit basis), and the consensus analyst EPS forecast for the subsequent 12 months was $1.18 (postsplit). Discuss whether the stock of eBay was efficiently priced in April 2003. (in answering the question, you may wish to refer to the discussion in Chapter 2.02. Consider the comments of Brian Walker, the president of Herman-Miller North America, who was quoted in the chapter as having said: “For Dot.coms, it appears that the market has implicitly capitalized a lot of those costs. The market views their negative earnings as investments in the future. It’s more difficult for a traditional Old Economy company trying to participate in the New Economy, because when it affects my earnings, it’s more difficult for Wall Street to say, ‘We will give you a break on this.”” Discuss Walker’s remark in the context of the concepts developed in the chapter. 3. Analyst Safa Rashtchy’s developed his 2010 forecast for EBay’s revenue by assuming that is annual growth would be about a 10 percent compounded annual growth rate between 2002 and 2010. In the previous year, eBay’s revenue had grown at the rate of 62 Percent, and the firm forecast that its revenue would increase by 58 Percent in 2003. Which, if any, of the behavioral elements described in chapter 1 might have affected Rashtchy’s long-term forecast? 4. Consider Robert Galvin’s approach to evaluating the satellite project proposal. The text suggests that in not developing discounted cash flow analysis, Galvin’s approach was flawed. In hindsight, Iridium was failed project for Motorola, and even positive NPV projects ca turn out to be failures after the fact, Can you provide a critique of the behaviorally based argument and suggest some reasons why in foresight it might have been entirely rational for Robert Galvin to have proceeded in the way that he did?

1.

Current Actual EPS = $0.82 post split

Current market price post split = $ 82

SO PE ratio (Price earning) ratio = Market price per share / Earning per share

= 82/0.82 = 100

In April 2003

Expected EPS = 1.45 pre split

So target market price should be = 1.45*100 = 145 pre split

Hence the stock was not correctly priced. It was undervalued.

2.

In this chapter Walker has clearly expressed his opinion on the new business strategy and it is vital for all to change the traditional practice to the new dot com strategies. In this a company needs to spend a lot on advertising and Information technology in order to attract customers and exist in the competitive market. Internet has become the most vital media to reach public at large.

3.

Rashrchy’s must have adopted very conservative approach while calculating the long term forecast of this company. EBay has reported 62% growth in revenue against its own forecasted data of 58% in 2003.

4.

Galvin did not use discounted cash flow, NPV, IRR or pay back analysis in deciding on the Iridium project. So the project failed. Galvin failed to consider time value of money in its calculation or project analaysis. Iridium did not have viable business plan. A reasonable evaluation of the project would have stopped further investment.