Facebook - Discounted Cash Flow (DCF) Analysis (Modified Prof. Damodaran)

	2011	2012E	2013E	2014E	2015E	2016E	2017E	2018E	2019E	2020E	2021E	Terminal
DCF ASSUMPTIONS:	BASE YEAR	1	2	3	4	5	6	7	8	9	10	YEAR
Revenue growth rate		40.0%	40.0%	40.0%	40.0%	40.0%	32.4%	24.8%	17.2%	9.6%	2.0%	2.0%
EBIT (Operating margin)	45.7%	44.6%	43.5%	42.5%	41.4%	40.3%	39.3%	38.2%	37.1%	36.1%	35.0%	35.0%
Tax rate	40.0%	40.0%	40.0%	40.0%	40.0%	40.0%	39.0%	38.0%	37.0%	36.0%	35.0%	35.0%
Increase in CAPEX + WC as % of sales		67%	67%	67%	67%	67%	67%	67%	67%	67%	67%	100%
Cost of capital		11.1%	11.1%	11.1%	11.1%	11.1%	10.5%	9.8%	9.2%	8.6%	8.0%	8.0%
Free cash flow to firm ($ millions):
Revenues	3,711	5,195	7,274	10,183	14,256	19,959	26,425	32,979	38,651	42,362	43,209	44,073
EBIT	1,695	2,318	3,167	4,325	5,903	8,051	10,377	12,599	14,353	15,279	15,123	15,426
EBIT (1-tax)	1,017	1,391	1,900	2,595	3,542	4,830	6,330	7,811	9,042	9,778	9,830	10,027
Increase in CAPEX + WC		995	1,392	1,949	2,729	3,821	4,333	4,391	3,800	2,486	568	864
FCFF		396	508	646	813	1,010	1,997	3,420	5,242	7,292	9,262	9,162
Terminal Value												152,707
Present value:
Cumulative discount factor		0.9002	0.8104	0.7296	0.6568	0.5912	0.5352	0.4872	0.4461	0.4107	0.3802	0.3802
PV of FCFF and TV		356	412	471	534	597	1,069	1,667	2,338	2,995	3,522	58,066
Value of firm	72,026.7
- Debt	1,088.9
+ Excess Cash	1,512.0
Value of equity	72,449.8
- Cost of equity options (after tax)	3,088.5			WACC	Equity	Debt	Preferred	Capital
Value of common equity	69,361.3			Market Values	$81,247.2	$1,088.9	$ -	$82,336.1
Number of shares (millions)	2,138.1			Weights in WACC	98.7%	1.3%	0.0%	100.0%
Estimated value/share	$32.44			Cost of Component	11.2%	2.4%	7.1%	11.1%
Price talk	$38.00
Price as % of value	117%

(A) What is the intrinsic value of a Facebook share? (PLEASE INCLUDE FORMULAS USED)

(B) How does this valuation compare to the price talk from the underwriters?

(C) Discuss Prof. Damodaran's valuation?

(D) Create your own valuation with the following assumptions about payout ratio? (PLEASE INCLUDE FORMLAS USED)

(i) Assume Facebook has a 100% dividend payout ratio

(ii) Assume Facebook has a 50% payout ratio

(iii) Assume Facebook has a 10% payout ratio