1. Stock valuation - A comparison of estimated values and marketprices Slim Perkins, a business journalist, is a recent hire at his firm. Since he joined the firm, he has been following Facebook Inc.s (FB) initial public offering (IPO) and the stocks performance. His task is to estimate Facebooks fair market value, also referred to as intrinsic value, and compare this value with the current stock price, and recommend a buy, sell, or hold rating to investors. Slim pulls the companys consolidated financial statements to collect relevant data on the companys historical financial performance. He notices that the company assumes a 45% marginal tax rate after the IPO, and mentions that the company projects that user rates and revenue growth will decline over time. Slim starts his evaluation by calculating ratios of costs and expenses to revenues, interest expense to revenues, and others that will form the set of assumptions in his analysis which will be used to calculate free cash flows.

Complete the following table. Note: When entering intermediate calculations, round to two decimal places, but do not round the intermediate calculations when determining final answers. Round all percentages to two decimal places. Slim posts his strategy on his social networking page to get some suggestions from his friends. Follow the discussion and complete the missing information: Since Facebook named Google as its prime competitor,[1] I am inclined to use Google Inc.s post-IPO performance as a benchmark for FBs expected financial performance for at least three to four years following the IPO. Does anyone already have the growth rates for Googles post-IPO revenues? After discussing the different aspects of the valuation, Slim puts together his FCF projections. Complete the missing elements from his projection: Note: When entering intermediate calculations, round to the nearest whole number, but do not round the intermediate calculations when determining final answers. For example: If the revenue growth rate is 11%, and the answers for revenue for 2012-2014 are 1103, 1224.33, and 1359.0063, then you should enter 1103, 1224, and 1359 as answers, but use 1359.0063 to calculate the revenue for 2015. If your answer is negative, use a minus (-) sign.

421,233,615 Shares FACEBOOK CLASS A COMMON STOCK Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows 2011 2010 2009 (in millions) (in millions) (in millions) Assets Cash and cash equivalents $3,908 $1,785 $633 Receivables 547 373 Prepaid expenses and other current assets 149 88 Total current assets $4,604 $2,246 Property and equipment, net 1,475 574 $148 Goodwill and intangible assets, net 162 96 Other assets 90 74 Total assets $6,331 $2,990 $1,109 Liabilities and equity $63 $29 171 75 296 137 Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenue and deposits Current portion of capital lease obligations Total current liabilities 90 42 279 106 IIIIIIIII $899 $389 398 117 Capital lease obligations, less current portion Long-term debt 250 Other liabilities 135 72 Total liabilities 1,432 828 241 Convertible preferred stock 615 615 Common stock Additional paid-in capital 2,684 947 Accumulated other comprehensive loss (6) (6) Retained earnings 1,606 606 Total stockholders' equity $4,899 $2,162 $868 Total liabilities and stockholders' equity $6,331 $2,990 Source: Facebook Inc. Prospectus. United States Securities and Exchange Commission, 17 May 2012. Web. 1 June 2012. http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows 2010 2011 (in millions) (in millions) $1,974 2009 (in millions) $777 Revenue $3,711 Costs and expenses Cost of revenue 860 493 223 Marketing and sales 427 184 115 Research and development 388 144 87 General and administrative 280 121 90 Total costs and expenses $942 $515 $1,955 $1,756 $1,032 $262 Income from operations Interest and other income (expense), net: Interest expense $(22) $(10) $(42) (19) (2) 2 Other income (expense), net Income before provision for income taxes $1,695 $1,008 $254 Provision for income taxes 695 402 25 Net income $1,000 $606 $229 332 234 107 Net income attributable to participating securities Net income attributable to class A and class B common stockholders $668 $372 $122 Source: Facebook Inc. Prospectus. United States Securities and Exchange Commission, 17 May 2012. Web. 1 June 2012 http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows Balances at Dec 31 (in millions) (in millions) (in millions) 2011 2010 2009 Convertible preferred stock $615 $615 $615 Class A and Class B common stock Additional paid-in capital 2,684 947 253 Accumulated other comprehensive loss (6) (6) Retained earnings (accumulated deficit) 1,606 606 Total stockholders' equity $4,899 $2,162 $868 Source: Facebook Inc. Prospectus. United States Securities and Exchange Commission, 17 May 2012. Web. 1 June 2012. http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows 2011 2010 2009 (in millions) (in millions) (in millions) Cash flows from operating activities Net income $1,000 $606 $229 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 323 139 78 Loss on write-off of assets 4 3 1 Share-based compensation 217 20 27 Other adjustments (1) Changes in assets and liabilities: Accounts receivable (174) (209) (112) Prepaid expenses and other current assets (31) (38) (30) Other assets (32) 17 (59) Accounts payable 6 12 (7) Platform partners payable 96 75 Accrued expenses and other current liabilities 38 20 27 Deferred revenues and deposits 49 37 1 Other liabilities 53 16 1 $1,549 $698 $155 Net cash provided by operating activities Cash flows from investing activities Purchases of property and equipment $(606) $(293) $(33) Purchases of marketable securities (3,025) Maturities of marketable securities 516 Sales of marketable securities 113 (3) Investments in non-marketable equity securities Acquisitions of business, net of cash acquired (24) 3 (22) (9) 6 (32) $(3,023) $(324) $(62) Change in restricted cash and deposits Net cash used in investing activities Cash flows from financing activities Net proceeds from issuance of convertible preferred stock Net proceeds from issuance of common stock $200 $998 $500 Proceeds from exercise of stock options 28 6 9 Proceeds from (repayments of) long-term debt (250) 250 Proceeds from sale and lease-back transactions 170 31 (181) (90) (48) 433 115 51 Principal payments on capital lease obligations Excess tax benefit from share-based award activity Net cash provided by financing activities Non-cash financing activities: Property and equipment acquired under capital leases $1,198 $781 $243 473 217 56 Source: Facebook Inc. Prospectus. United States Securities and Exchange Commission, 17 May 2012. Web. 1 June 2012. http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc Estimated Assumptions 2011 2010 2009 Average % % % % 1. Total cost and expenses as a percentage of revenue 2. Operating current assets (in millions) 3. Growth in operating current assets % 4. Operating current liabilities (in millions) 5. Growth in operating current liabilities % 6. Depreciation and amortization as a percentage of revenues % % % % 7. Net fixed assets as a percentage of revenues % % % % NATALYA: Hi Slim, according to a trading blog [2] I follow, Google's post-IPO average revenue growth over five quarters was 18%. SLIM: Thank you, Natalya! I also discovered in the annual report that FB's internal projections use a 5% perpetual growth rate. I will be using a two-stage discounted cash flow model. I will base my FCF calculations on the following equation: FCF = Net Operating Profit After Taxes + Depreciation - Capital Expenditure - A in Net Operating Working Capital Am I missing something? TED: Slim, just one very important point. In your NOWC calculations I recommend using the growth in current assets as the assumption for growth in current liabilities after two years be ise current liabilities cannot grow faster than current assets fo Such on WC is not sustainable. You could use Google's WACC in your calculations. Google is currently using a 9.5% WACC. Investors would require an additional premium 6.5% for Facebook's stock. use these values to calculate FB's SLIM: Thanks, Ted! This information is really helpful. Using Google as a comparable, it would be fair investors' required rate of return, which will be NATALYA: Hi Slim, according to a trading blog [2] I follow, Google's post-IPO average revenue growth over five quarters was 18%. SLIM: Thank you, Natalya! I also discovered in the annual report that FB's internal projections use a 5% perpetual growth rate. I will be using a two-stage discounted cash flow model. I will base my FCF calculations on the following equation: FCF = Net Operating Profit After Taxes + Depreciation - Capital Expenditure - A in Net Operating Working Capital Am I missing something? TED: Slim, just one very important point. In your NOWC calculations I recommend using the growth in current assets as the assumption for growth in current liabilities after two years because current liabilities cannot grow faster than current assets forever. Such rundown on WC is not sustainable. You could use Google's WACC in your calculations. Google is currently using a 9.5% WACC. Investors would require an additional premium of 6.5% for Facebook's stock. SLIM: Thanks, Ted! This information is really helpful. Using Google as a comparable, it would be fair to use these values to calculate FB's investors' required rate of return, which will be 9.0% [1] Brandon Hunter, Jesse Fischer, and Shafiel Karim, "What Face lly Worth," Seeking Alpha (blog), May 15, 2012, http://seekingalpha.com/article/589741-what- facebook-is-really-worth. 16.0% [2] Husky Financial, "Facebook Vs. Google: What You Need To Kn 11.0%," Seeking Alpha (blog), May 17, 2012, http://seekingalpha.com/article/598731-facebook-vs-google- what-you-need-to-know-post-ipo 10.0% 2012 2014 2016 2017 2018 2013 (in millions) (in millions) 2015 (in millions) (in millions) (in millions) (in millions) millions) Revenue growth rate 18% 18% 18% 18% 18% 5% 5% Revenues $ $ $ $ $ $ $ - Total costs and expenses Income from operations (EBIT) - Taxes Net operating profit after taxes (NOPAT) Operating current assets Operating current liabilities NOWC Change in NOWC Net fixed assets (plant property & equipment) Change in net fixed assets + Depreciation and amortization Capital expenditure Free cash flow Present value of FCF Horizon value Present value of horizon value Total firm value The value of total long-term liabilities that FB reported in 2011 was $ million, and the value of preferred stock in 2011 was million. Thus, using the firm's value, the derived equity value will be $ million. The company issued 421,233,615 shares of class A common stock in 2012. Thus, the value of each stock, rounded to two decimal places, is $ $ According to the SEC filings, FB stock's IPO was priced at $38.00 per share. If Slim strictly follows the theoretical rules of investing, based on his analysis, what strategy would he recommend to investors interested in FB's stock as an asset in their short-term investment portfolio? Buy Hold Sell