Please read the Harvard Case Study eBay Inc.: Internet Success or Fairy Tale? by

ID: 2648351 • Letter: P

Question

Please read the Harvard Case Study eBay Inc.: Internet Success or Fairy Tale? by David F. Hawkins and Jacob Cohen. This case study can be found in the Harvard Case Study website using the following link: http://cb.hbsp.harvard.edu/cb/access/13637669

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Please answer the following questions about the case study:

Use the 2002 Financial Statement data to replicate the Meyer's report calculations that illustrate the following conclusion based on the 2001 data reached in the report: eBay has never been profitable. Why? Why not?

Do you agree with Meyer's report concept of "unfettered" cash flow? Why? Why not?

What other conclusions can you reach about the company from the case study?

Explanation / Answer

1. The company has always in profit from 2000 to 2002. It is showing and earnings per share of $0.19 in 2000 and increased to $0.87 to 2002. If there would be no profit, how the company would be showing earnings per share. According to Meyer’s, the profit seems to be overstated, therefore asking for some adjustments, but whatever has been shown are according to accounting standards and principle, for example, the goodwill does not need to be amortized, as it is an infinite asset and the interest income is also the part of business, therefore it should also be included in showing the profit.

2. Any investment which is made by the company which is not necessary to run the operation of the business should not be deducted from cash flow to determine the free cash flow. If the company is not bound to buy the shares from the stock, then it is wrong to say that the free cash flow is overstated, the unfettered free cash flow has not meaning in this regard, however, an investor can develop his or her own standard to determine the amount of cash flow available to pay as dividend, regardless of any restriction or not and company invest in the business for any reason. showing the profit.

All in millions

2001

2002

Difference

% Change

Sales

749

1214

465

62%

EPS

0.34

0.87

0.53

156%

Assets

1679

4124

2445

146%

Liabilities

249

568

319

128%

SHE

1430

3556

2126

149%

The company financial position is improving, which is evident from the fact that the sales has increased by around 62% and earnings per share has increased by around 156%, which shows that company has good control over its expense, as the pace of increase in profit is faster than increase in sales. The total assets increase by around 146%, which shows the expansion of company and the increase in total debts is less than increase in total assets, it means that company is not relying heavily on debt financing, rather on equity financing. The increase in profit has also increased the shareholders equity of the company by around 149%.