You are trying to value Toktik a social network in the early stages of its development.Income is driven by advertising revenue and is the product of two metrics: number ofusers and Average (advertising) Revenue Per User (ARPU). There are costs to acquireusers and to service them. The firm also faces overhead costs and need to invest tomaintain and improve its interface and infrastructure.You are at the beginning of year 1 and you work from the following assumptions:

• The (expected) number of users in year 1 is 190 millions. The growth of the userbase from year 1 to year 2 is 25% and then declines by 2.5% every year (i.e., growth
is 22.5% from year 2 to 3, 20% from year 3 to 4 etc). When growth reaches 0%, itstays at 0.
• ARPU in year 1 is €3. The ARPU's growth is 5% from year 1 to year 2 and thendeclines by 1% every year (i.e., growth is 4% from year 2 to 3, 3% from year 3 to 4etc). When growth reaches 0%, it stays at 0.
• User servicing costs are €0.80 per year per user, constant over time.
• User acquisition cost is €10.00 per user. This is a one-time cost incurred in the yearthe user joins the network. If the network has X users in year N − 1 and Y usersin year N, assume that X-Y users joined in year N (for simplicity, we do not modeluser attrition). 40 million users joined in year 1.
• Overhead costs are m€60 in year 1 and grow like the user base.
• CAPEX is m€100 in year 1 and grows like the user base. Capital expenditures aredepreciated linearly over 4 years (i.e., 25% of the CAPEX of year N is depreciatedin years N + 1 to N + 4). To simplify, assume that Toktik's assets in place beforeyear 1 are not depreciated.
• Net working capital is 2.5% of sales. It was m€8 in year 0.
• Corporate tax rate is 30% and net operating losses can be carried forward.

Derive Toktik's unlevered cash-flows for years 1 to 10.


2. Facebook has an equity β of 0.86 and a leverage L = −0.02. Twitter has an equitybeta of 0.91 and a leverage L = 0.06 (assume their net debt carries no systematic
risk). The long term (30-year) risk-free rate is 3.06% and the market risk premiumis 5.5%. Assume that Toktik's unlevered cash-flows grows at 3% per year after year10. Compute Toktik's equity value if Toktik has a leverage of 0.

3. Suppose now that Toktik has leverage L = 0.3 constant over time (everything elseis as before). Compute Toktik's equity value.