Yahoo 2013 Annual Report Download - page 69

estimated control premium. Under the income approach, we determine fair value based on estimated future cash
flows of each reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall
level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates
and assumptions, including selection of market comparables, estimated future cash flows, and discount rates.
These components are discussed below:
•Market comparables
We select comparable companies in the specific regions in which these reporting units operate based on
similarity of type of business, primarily those involved in online advertising, relative size, financial profile,
and other characteristics of those companies compared to these reporting units. Trailing and forward revenue
and earnings multiples derived from these comparable companies are applied to financial metrics of these
reporting units to determine their estimated fair values, adjusted for an estimated control premium.
•Estimated future cash flows
We base cash flow projections for each reporting unit using a forecast of cash flows and a terminal value based
on the Perpetuity Growth Model. The forecast and related assumptions were derived from the most recent
annual financial forecast for which the planning process commenced in our fourth quarter. Key assumptions in
estimating future cash flows include, among other items, revenue and operating expense growth rates, terminal
value growth rate, and capital expenditure and working capital levels.
•Discount rates
We employ a Weighted Average Cost of Capital (“WACC”) approach to determine the discount rates used in
our cash flow projections. The determination of the discount rates for each reporting unit includes factors such
as the risk-free rate of return and the return an outside investor would expect to earn based on the overall level
of inherent risk. The determination of expected returns includes consideration of the beta (a measure of
volatility) of traded securities of comparable companies and risk premiums of reporting units based on
international cost of capital methods.
The components above require us to make assumptions about the timing and amount of future cash flows, growth
rates and discount rates. Significant management judgment is involved in determining these estimates and
assumptions, and actual results may differ from those used in valuations. Changes in these estimates and
assumptions could materially affect the determination of fair value for each reporting unit which could trigger
future impairment. To facilitate a better understanding of how these valuations are determined, a discussion of
our significant assumptions is provided below.
Discount rate assumptions for these reporting units take into account our assessment of the risks inherent in the
future cash flows of the respective reporting unit and our weighted-average cost of capital. We also review
marketplace data to assess the reasonableness of our computation of our overall weighted average cost of capital
and, when available, the discount rates utilized for each of these reporting units.
In determining the fair value of (1) the Europe reporting unit, (2) the India & Southeast Asia reporting unit, and
(3) the Middle East reporting unit, we used the following assumptions:
• Expected cash flows underlying our business plans for the periods 2014 through 2024.
• Cash flows beyond 2024 are projected to grow at a perpetual growth rate.
• In order to risk adjust the cash flow projections in determining fair value, we utilized discount rates of
approximately 11 percent to 15 percent for each of these reporting units.
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