CORPORATE FINANCE

Face Book Valuation

Abstract

This paper intends to explore the financial aspects of a corporation. For this purpose Face book has been chosen as a reference company to analyse its IPO stock price and current stock price in terms of Efficient Market Hypothesis. Further, responsibilities of financial manager is discusses with regards to maximizing shareholder's benefit.

Table of Content

Investment Appraisal Techniques1

Weighted Average Cost of Capital (WACC)4

Application to financial management decisions8

Capital Structure Theory8

Risk in investment decisions9

Relevant Risk Premiums9

Efficient Marketing Hypothesis11

Factors Affecting IPO12

Question. 112

Question. 213

Question. 313

Conclusion14

References15

Face Book Valuation

Investment Appraisal Techniques

In this paper, the technique which is used in assessing the investment is net present value. The valuation is based on the three years cash flow statements of the company “FACE BOOK”. The total amount of cash outflow is compromised of the investments in the company from year 2004 to 20011. The cash inflows only consist of the cash flows of three years not the inflows of 2004 to 2007. The net present value is calculated under three different scenarios. In the first scenario, the discount rate used is 11 percent which gives the net present value of -308 million. In the second scenario, the discount rate used is 13 percent which gives the net present value of -347 million. In the third scenario, the discount rate used is 15 percent which gives the net present value of -381 million. It is worth noting that the cash outflow contains the investments of years prior to 2007 but inflows consist of only 3 years. Therefore, the impact of not incorporated cash inflows of years prior to 2007 is a limitation for the analysis.

Face book Inc.

Statements of Cash Flow

Operating Activities

 

Fiscal year is January-December. All values USD millions.

 

2009

2010

2011

Net Income before Extra ordinaries

 

229,000,000

606,000,000

1,000,000,000

Depreciation, Depletion & Amortization

 

78,000,000

139,000,000

323,000,000

Depreciation and Depletion

 

76,000,000

130,000,000

303,000,000

Amortization of Intangible Assets

 

2,000,000

9,000,000

20,000,000

Deferred Taxes & Investment Tax Credit

 

0

0

0

Deferred Taxes

 

0

0

0

Investment Tax Credit

 

0

0

0

Other Funds

 

27,000,000

23,000,000

221,000,000

Funds from Operations

 

334,000,000

768,000,000

1,540,000,000

Extra ordinaries

 

0

0

0

Changes in Working Capital

 

-179,000,000

-70,000,000

5,000,000

Receivables

 

-112,000,000

-209,000,000

-174,000,000

Accounts Payable

 

-7,000,000

87,000,000

102,000,000

Other Assets/Liabilities

 

-87,000,000

32,000,000

39,000,000

 Net Operating Cash Flow

 

155,000,000

698,000,000

1,550,000,000

Investing Activities

 

Capital Expenditures

 

-33,000,000

-293,000,000

-606,000,000

Capital Expenditures (Fixed Assets)

 

-33,000,000

-293,000,000

-606,000,000

Capital Expenditures (Other Assets)

 

0

0

0

Net Assets from Acquisitions

 

0

-22,000,000

-24,000,000

Sale of Fixed Assets & Businesses

 

3,000,000

0

0

Purchase/Sale of Investments

 

0

0

-2,400,000,000

Purchase of Investments

 

0

0

-3,030,000,000

Sale/Maturity of Investments

 

0

0

629,000,000

Other Uses

 

-32,000,000

-9,000,000

0

Other Sources

 

0

0

6,000,000

 Net Investing Cash Flow

 

-62,000,000

-324,000,000

-3,020,000,000

Financing Activities

 

Cash Dividends Paid - Total

 

0

0

0

Common Dividends

 

0

0

0

Preferred Dividends

 

0

0

0

Change in Capital Stock

 

209,000,000

506,000,000

1,030,000,000

Repurchase of Common & Preferred Stk.

 

0

0

0

Sale of Common & Preferred Stock

 

209,000,000

506,000,000

1,030,000,000

Proceeds from Stock Options

 

200,000,000

500,000,000

998,000,000

Other Proceeds from Sale of Stock

 

9,000,000

6,000,000

28,000,000

Issuance/Reduction of Debt, Net

 

-48,000,000

160,000,000

-431,000,000

Change in Current Debt

 

0

0

0

Change in Long-Term Debt

 

-48,000,000

160,000,000

-431,000,000

Issuance of Long-Term Debt

 

0

250,000,000

0

Reduction in Long-Term Debt

 

-48,000,000

-90,000,000

-431,000,000

Other Funds

 

82,000,000

115,000,000

603,000,000

Other Uses

 

0

0

0

Other Sources

 

82,000,000

115,000,000

603,000,000

 Net Financing Cash Flow

 

243,000,000

781,000,000

1,200,000,000

Exchange Rate Effect

 

-

-3,000,000

3,000,000

Miscellaneous Funds

 

0

0

0

Net Change in Cash

 

336,000,000

1,150,000,000

-273,000,000

 Free Cash Flow

 

122,000,000

405,000,000

943,000,000

(Source: Market Watch)

Calculation of NPV in three different scenarios

Calculation of NPV in three different scenario

Out flow or Initial Investments

2004-2011

2009

2010

2011

Outflow or investments of every year

422.325

200.00

120

728.5

Accumulated cash outflows in million

1,470.83

Accumulated cash outflows

(1,470,825,000)

Ist Scenario

2nd Scenario

3rd Scenario

Discount rate

11.00%

13.00%

15.00%

NPV

($308,733,812.7)

($347,026,273.)

($381,271,348.7)

Weighted Average Cost of Capital (WACC)

Face book Inc.

Balance Sheet

Assets

 

 

 

 

 

Fiscal year is January-December. All values USD millions.

2007

2008

2009

2010

2011

 Cash & Short Term Investments

305

297

633

1790

11360

Cash Only

305

297

633

-

8970

Short-Term Investments

-

-

-

-

2400

 Total Accounts Receivable

-

-

-

373

547

Accounts Receivables, Net

-

-

-

373

547

Accounts Receivables, Gross

-

-

-

384

564

Bad Debt/Doubtful Accounts

-

-

-

-11

-17

Other Receivables

-

-

-

0

0

Inventories

-

-

-

0

0

Finished Goods

-

-

-

0

0

Work in Progress

-

-

-

0

0

Raw Materials

-

-

-

0

0

Progress Payments & Other

-

-

-

0

0

Other Current Assets

-

-

-

88

149

Miscellaneous Current Assets

-

-

-

88

149

Total Current Assets

-

-

-

2.25B

12060

 

 

 

 

 

 

Net Property, Plant & Equipment

82

131

148

574

1480

Property, Plant & Equipment - Gross

-

-

-

820

1930

Buildings

-

-

-

0

355

Land & Improvements

-

-

-

29

34

Computer Software and Equipment

-

-

-

61

73

Other Property, Plant & Equipment

-

-

-

58

120

Accumulated Depreciation

-

-

-

246

450

Total Investments and Advances

-

-

-

0

0

Other Long-Term Investments

-

-

-

0

0

Long-Term Note Receivable

-

-

-

0

0

Intangible ...