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 stock's performance. His task is to estimate Facebook's tale 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 company's consolidated financial statements to collect relevant data on the company's historical financial performance He notices that the company assumes 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. 421,233,613 Shares FACEBOOK CLASS A COMMON STOCK Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows 2011 (in millions) 2010 (in millions) 2009 (in millions) $3,908 $1,785 $633 547 373 149 88 $2,246 $4,604 1,475 574 $148 162 96 90 74 $6,331 $2,990 $1,109 $63 $29 171 75 Assets Cash and cash equivalents Receivables Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill and intangible assets, net Other assets Total assets Liabilities and equity Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenue and deposits Current portion of capital lease obligations Total current liabilities Capital lease obligations, less current portion Long-term debt Other liabilities Total liabilities Convertible preferred stock Common stock Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total stockholders' equilty Total liabilities and stockholders' equity 296 137 90 42 279 106 $389 $899 398 117 250 135 72 828 241 1,432 615 615 2,684 (6) 1,606 947 (6) 606 $4,899 $2,162 $868 $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/1326801/000119312512240111/0207954647484. mitoc Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows 2011 (in millions) 2010 (in millions) $1,974 2009 (in millions) $777 Revenue $3,711 860 493 223 427 184 115 388 144 87 280 121 90 $1,955 $942 $515 $1,756 $1,032 $262 Costs and expenses Cost of revenue Marketing and sales Research and development General and administrative Total costs and expenses Income from operations Interest and other income (expense), net: Interest expense Other income (expense), net Income before provision for income taxes Provision for income taxes Net Income Net Income attributable to participating securities Net Income attributable to class A and class B common stockholders $(42) (19) $1,695 695 $(22) (2) $1,008 $(10) 2 $254 402 25 $606 $1,000 332 $229 107 234 $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/1326601/000119312512240111/82879540424b4.htm toc Balance Sheet Income Statement Statement of injholder's Equity Statement of Cash Flows Balances at Dec 31 (in millions) (in millions) (in millions) 2011 2010 2009 $615 $615 $615 Convertible preferred stock Class A and Class B common stock Additional paid-in capital Accumulated other comprehensive loss Retained earings (accumulated delicit) Total stockholders' equity 253 2,684 (6) 1,606 947 (6) 606 $4,899 $2,162 $868 Source: Facebook Inc. Prospectus. United States Securities and Exchange Commission, 17 May 2012. Web. 1 Sune 2012 http://www.sec.gov/Archives/egat/data/1325801/000119512512240111/828795404244 m 2011 2010 (in millions) (in millions) 2009 (in millions) $1,000 $606 $229 323 139 78 3 1 4 217 20 27 (1) (174) (31) (32) (209) (38) 17 (112) (30) (59) (7) 6 12 75 96 38 20 27 49 37 1 53 16 1 $1,549 $698 $155 Cash flows from operating activities Net income 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 assets Other assets Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenues and deposits Other labilities Net cash provided by operating activities Cash flows from investing activities Purchases of property and equipment Purchases of marketable securities Maturities of marketable securities Sales of marketable securities Investments in non-marketable equity securities Acquisitions of business, net of cash acquired 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 Proceeds from exercise of stock options Proceeds from (repayments of long-term debt Proceeds from sale and lease-back transactions 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 lenses $(293) $(33) $(606) (3,025) 516 113 (3) (24) 3 (22) (9) 6 (32) $(3,023) $(324) $(62) $200 $998 $500 28 6 9 250 (250) 170 31 (90) (181) 433 (48) 51 115 $1,198 $781 5243 423 217 56 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. Estimated Assumptions 1. Total cost and expenses as a percentage of revenue 2011 2010 2009 Average 9 %6 % 2. Operating current assets (in millions) 3. Growth in operating current assets 4. Operating current liabilities (in millions) 5. Growth in operating current liabilities % l- 6. Depreciation and amortization as a percentage of revenues 7. Net fixed assets as a percentage of revenues % 96 % % 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 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 Google's post-IPO revenues? NATALYA: H. Sim, according to a trading blog 14 I follow, Google's post-IPO average revenue growth over five quarters was 18%. SLIN: 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 abilities 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 5.5% 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 Investors' required rate of return, which will be Brandon SOCK SLIIThanks, Tedi This informations really helpful. Using Google as a comparable would be to use these values to calculate per Investors' required to return, which will be rreth What Is By Singly 13, 2013.md/5934- www. ---- YOS, May 11, 2012, Ather discussing the different spects of the valuation, sm puts together his Fo protection Complete the main elements from het projection Note: When entering intermediate lotions, round in the nearest whole number, but do not found the intermediate calculation when determining final newers. For example of the revenue growth rate is 115, and the answer for revenue for 2012-2014 1103, 122433 and 1359.0063, then You should enter 1103, 1224 and 1399 sawwers, but st 1359.0063 to calculate the revenue for 2015. If your answer is negative, use a minus ign 2012 2013 2014 (in millions) 2016 (in mo) 2015 rin millions) 189 2017 (in million) 2013 in minions) milions) miliona) Revenue growth rate Revenues SS 2014-001 IO 1014-000 DO Il ll - Total costs and expenses Income from operatione (EBIT) - Tases Net operating profit after taxes (NOPAT) Operating current Operating current abtites NOWC Change in NOWC Netfases (blant property equipment Change in met de Depreciation and amortization Capital expenditure Free cash now Present value ofro Hora Present value of hon valve Total firm value = II III III II The value of total long-term labies that reported in 2011 was milion, and the value of preferred stock in 2011 million. Thus, using the sales, the derived quity value will milion. The company und 421,233,615 shares of ass A stock in 2012. Thus, the value of each stock, rounded to the decimal places According to the SEC hinga, o Po was priced at $36.00 per here. If Setly for the theoretical vies festing, based on analysis what we would he recommend to investor interested in FB stat in their short-term met portal Buy Hold 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 stock's performance. His task is to estimate Facebook's tale 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 company's consolidated financial statements to collect relevant data on the company's historical financial performance He notices that the company assumes 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. 421,233,613 Shares FACEBOOK CLASS A COMMON STOCK Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows 2011 (in millions) 2010 (in millions) 2009 (in millions) $3,908 $1,785 $633 547 373 149 88 $2,246 $4,604 1,475 574 $148 162 96 90 74 $6,331 $2,990 $1,109 $63 $29 171 75 Assets Cash and cash equivalents Receivables Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill and intangible assets, net Other assets Total assets Liabilities and equity Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenue and deposits Current portion of capital lease obligations Total current liabilities Capital lease obligations, less current portion Long-term debt Other liabilities Total liabilities Convertible preferred stock Common stock Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total stockholders' equilty Total liabilities and stockholders' equity 296 137 90 42 279 106 $389 $899 398 117 250 135 72 828 241 1,432 615 615 2,684 (6) 1,606 947 (6) 606 $4,899 $2,162 $868 $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/1326801/000119312512240111/0207954647484. mitoc Balance Sheet Income Statement Statement of Stockholder's Equity Statement of Cash Flows 2011 (in millions) 2010 (in millions) $1,974 2009 (in millions) $777 Revenue $3,711 860 493 223 427 184 115 388 144 87 280 121 90 $1,955 $942 $515 $1,756 $1,032 $262 Costs and expenses Cost of revenue Marketing and sales Research and development General and administrative Total costs and expenses Income from operations Interest and other income (expense), net: Interest expense Other income (expense), net Income before provision for income taxes Provision for income taxes Net Income Net Income attributable to participating securities Net Income attributable to class A and class B common stockholders $(42) (19) $1,695 695 $(22) (2) $1,008 $(10) 2 $254 402 25 $606 $1,000 332 $229 107 234 $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/1326601/000119312512240111/82879540424b4.htm toc Balance Sheet Income Statement Statement of injholder's Equity Statement of Cash Flows Balances at Dec 31 (in millions) (in millions) (in millions) 2011 2010 2009 $615 $615 $615 Convertible preferred stock Class A and Class B common stock Additional paid-in capital Accumulated other comprehensive loss Retained earings (accumulated delicit) Total stockholders' equity 253 2,684 (6) 1,606 947 (6) 606 $4,899 $2,162 $868 Source: Facebook Inc. Prospectus. United States Securities and Exchange Commission, 17 May 2012. Web. 1 Sune 2012 http://www.sec.gov/Archives/egat/data/1325801/000119512512240111/828795404244 m 2011 2010 (in millions) (in millions) 2009 (in millions) $1,000 $606 $229 323 139 78 3 1 4 217 20 27 (1) (174) (31) (32) (209) (38) 17 (112) (30) (59) (7) 6 12 75 96 38 20 27 49 37 1 53 16 1 $1,549 $698 $155 Cash flows from operating activities Net income 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 assets Other assets Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenues and deposits Other labilities Net cash provided by operating activities Cash flows from investing activities Purchases of property and equipment Purchases of marketable securities Maturities of marketable securities Sales of marketable securities Investments in non-marketable equity securities Acquisitions of business, net of cash acquired 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 Proceeds from exercise of stock options Proceeds from (repayments of long-term debt Proceeds from sale and lease-back transactions 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 lenses $(293) $(33) $(606) (3,025) 516 113 (3) (24) 3 (22) (9) 6 (32) $(3,023) $(324) $(62) $200 $998 $500 28 6 9 250 (250) 170 31 (90) (181) 433 (48) 51 115 $1,198 $781 5243 423 217 56 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. Estimated Assumptions 1. Total cost and expenses as a percentage of revenue 2011 2010 2009 Average 9 %6 % 2. Operating current assets (in millions) 3. Growth in operating current assets 4. Operating current liabilities (in millions) 5. Growth in operating current liabilities % l- 6. Depreciation and amortization as a percentage of revenues 7. Net fixed assets as a percentage of revenues % 96 % % 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 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 Google's post-IPO revenues? NATALYA: H. Sim, according to a trading blog 14 I follow, Google's post-IPO average revenue growth over five quarters was 18%. SLIN: 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 abilities 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 5.5% 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 Investors' required rate of return, which will be Brandon SOCK SLIIThanks, Tedi This informations really helpful. Using Google as a comparable would be to use these values to calculate per Investors' required to return, which will be rreth What Is By Singly 13, 2013.md/5934- www. ---- YOS, May 11, 2012, Ather discussing the different spects of the valuation, sm puts together his Fo protection Complete the main elements from het projection Note: When entering intermediate lotions, round in the nearest whole number, but do not found the intermediate calculation when determining final newers. For example of the revenue growth rate is 115, and the answer for revenue for 2012-2014 1103, 122433 and 1359.0063, then You should enter 1103, 1224 and 1399 sawwers, but st 1359.0063 to calculate the revenue for 2015. If your answer is negative, use a minus ign 2012 2013 2014 (in millions) 2016 (in mo) 2015 rin millions) 189 2017 (in million) 2013 in minions) milions) miliona) Revenue growth rate Revenues SS 2014-001 IO 1014-000 DO Il ll - Total costs and expenses Income from operatione (EBIT) - Tases Net operating profit after taxes (NOPAT) Operating current Operating current abtites NOWC Change in NOWC Netfases (blant property equipment Change in met de Depreciation and amortization Capital expenditure Free cash now Present value ofro Hora Present value of hon valve Total firm value = II III III II The value of total long-term labies that reported in 2011 was milion, and the value of preferred stock in 2011 million. Thus, using the sales, the derived quity value will milion. The company und 421,233,615 shares of ass A stock in 2012. Thus, the value of each stock, rounded to the decimal places According to the SEC hinga, o Po was priced at $36.00 per here. If Setly for the theoretical vies festing, based on analysis what we would he recommend to investor interested in FB stat in their short-term met portal Buy Hold