1. Stock Valuation- a comparison of estimated values and market prices

Slim Perkins, a business journalist, is a recent hire at his firm. Since he joined the firm, he has been following Facebook Inc.(FB) initial public offering and the stock's performance. His task is to estimate Facebook's 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 comapany's consolidated financial statements to cellect relevant data on the company's 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 evluation by calculating rations of costs and expenses to revenues, interest expenses to revenues and others that will form the set of assumptions in his analysts which will be used to calculate free cash flows

Estimated Assumptions	2011	2010	2009	Average
1. Total cost & expensesas a % of Revenue
2. Operating current assets	-------	-------
3. Growth in operating current assets	-------	-------	-------
4. Operating current liabilites	-------	-------
5. Growth in operating liabilites	-------	-------	-------
6. Depreciation & amortization as a % of revenue
7. net fixed assets as a % of revenue

Slim post his strategy on his Facebookj to get some suggestions:

Slim:Since Facebook named Google as its prime competitor, I am inclined to use Google Inc's post-IPO performance as a benchmark for FB'sexpected financial performance for at least 3 to 4 years following the IPO. Does anyone already have thegrowth ratesfor Google's post-IPO revenues?

Natalya:Hi Slim, according to a trading blog I follow, Google's post-IPO average revenue growth over five quarters was18%

Slim:Thank you, Natalya! I also discovered in the annial report that FB's internal projections use a 5% pertetual 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 + Depreication - Captial Expenditure - ^ 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 could not 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 3.5% for Facebook's stock.

Slim:Thanks, Ted! This information is really helpfull. 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 ______?

A. 7% B.6% C. 8% D. 13%

Slim puts together his FCF projections. Complete the missing elements from his projections:

Revenue growth rate	2012	2013	2014	2015	2016	2017	2018
Revenues
- Total costs & expenses
Income from Operation EBIT
- Taxes
Net operating profit after Taxes
Operating current assets
Operating current liabilities
NOWC
Change in NOWC
Net fixed assets (Plants,Property, Equip)
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 ________ , and the value of preferred stock in 2011 was _________. Thus, using the firm's value, the derived equity value will be __________. The company issued ___________ shares of Class A common stock in 2012. Thus, the value of each stock 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 reccommed to investors interested in FB's stock as an assets in their Short-term investment portfolio?

A. Buy B. Hold C. Sell D All the above E. Buy and hold F. Sell and hold

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