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

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][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?

Drop down options: 10.0% 17.0% 11.0% 12.0%

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.

Please & Thank You!

Liabilities and equity Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization Loss on write-off of assets Share-based compensation Other adjustments Changes in assets and liabilities: Accounts receivable Prepaid expenses and other current asset Other assets Accounts payable Platform partners payable Accrued expenses and other current liabilition Deferred revenues and deposits Other liabilities Net cash provided by operating activit Cash flows from investing activities (112) (30) (59) (7) Purchases of property and equipment Purchases of marketable securities (3,025) Maturities of marketable securities 516 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. 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 - 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 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 7.5\% 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 calcule investors' required rate of return, which will be (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 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 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? Liabilities and equity Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization Loss on write-off of assets Share-based compensation Other adjustments Changes in assets and liabilities: Accounts receivable Prepaid expenses and other current asset Other assets Accounts payable Platform partners payable Accrued expenses and other current liabilition Deferred revenues and deposits Other liabilities Net cash provided by operating activit Cash flows from investing activities (112) (30) (59) (7) Purchases of property and equipment Purchases of marketable securities (3,025) Maturities of marketable securities 516 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. 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 - 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 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 7.5\% 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 calcule investors' required rate of return, which will be (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 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 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