DISCUSSION ASSIGNMENT:
Overview
Sometimes you have to look beyond what is presented to question what is reported or provided in an opinion. Numbers can be misleading and you should learn to question assumptions regarding the numbers presented. This will in turn provide you with greater insight into the realities of the situation.
Discussion Topic: Case Study
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. This link is in your Syllabus.
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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?
PLEASE WRITE A REPLY TO THESE PEOPLE BELOW: A SOLID 2 PARAGRAPH WILL DO WITH A REFERENCE:
DISCUSSION RESPONSES:
((Taylor Barnick))
Meyer’s report discussed the idea that eBay was never a profitable business, despite what everyone thought. He stated that the reported earnings should be adjusted to include a 10 year amortization charge, excluded interest income, and an option expense deduction. He explains that companies have the option to recognize the fair value of option grants as an operating cost or they are able to disclose the impact of fair value accounting in financial statements. Because this was not done, cash flow was extremely overstated. Additionally, stock options provided to employees was given more freely than should have been which let to a dilution of ownership that had to later be rectified. (Hawkins & Cohen, 2014)
Free cash flow is the amount of cash that is available for distribution to a company’s investors, creditors, and stockholders, according to Brigham & Ehrhardt (2020). Meyer states that eBay’s cash flow was overstated because the amount necessary to acquire stock for the purposes of issuing stock to satisfy stock option disbursement was not yet satisfied at the time of the estimation. I agree with this sentiment, seeing as the cost to purchase what was remaining would result in unfettered cash flow. (Hawkins & Cohen, 2014)
References
Brigham, E. & Ehrhardt, M. (2020). Financial Management: Theory & Practice. Cengage Learning.
Hawkins, D., & Cohen, J. (2014). eBay Inc.: Internet Success or Fairy Tale? Harvard Business Publishing Education.
((Bea Hernandez))
The Meyer’s report believed that reported earnings be adjusted for a 10-year goodwill amortization charge and an option expense deduction. eBAY had ceased amortizing goodwill in the beginning of the same year of Meyer’s report. According to Brigham & Erhardt (2019), the accounting treatment of goodwill had changed. It is now required to periodically evaluate the value of goodwill and only report material decreases. This makes sense because goodwill is an intangible asset that is hard to quantify and can be infinite. The interest income can be taxed as ordinary income but if received by another corporation, the dividends are limited to 50% exclusion from taxable income (Brigham & Erhardt, 2019).
Meyer’s report concept of “unfettered” cash flow states conventional cash flow was deducted to purchase stock in the open market to satisfy stock options put to the company. The disparity between market value of the shares and the free cash is the reason Meyer’s finds no “unfettered” cash flow. eBAY has opted to incur a “negative use” of free cash flow which in turn provides more free cash flow to use (Brigham & Erhardt, 2019). This is an option of free cash flow under their capital structure.
eBAY has chosen to use the GAAP principles in areas where their financial statements are positively reflected. This is their option to exercise reporting according to the various procedures of GAAP. The fact that Meyer’s would like to see more transparency in their reporting could be a recommendation.
Bea
Reference
Brigham, E. F., & Erhardt, M. C. (2019). Financial management: Theory & practice (16th Edition). Cengage Learning US.
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