Please prepare a write-up detailing the results of your analysis. You do not need to include a...

Question

Please prepare a write-up detailing the results of your analysis. You do not need to include a separate section detailing the background of the case in the write-up. Instead, focus only on the financial issues and assumptions to make your recommendation. The write-up can be no longer than 3 pages (excluding tables and charts).

Include a copy of the forecast table in your write-up so I know which worksheet to look at

"Calculate the discount rate, estimate future cash flows, and then use the discounted cash flow method and multiples to price Facebook’s IPO. - What is the appropriate price for the Facebook IPO? Why"
(Case is attached)

instructions-facebook-case-wackycgd.pdf case-facebook-ipo-dntq1ywm.pdf facebookinitialpublicofferingtables-xe3dnwcb-53bl40dm.xls facebookinitialpublicofferingtables-xe3dnwcb-tw1tdfqi.xls

Shakeel · Accepted Answer

Calculation of discount rate
The Discount rate is assumed here the “Weighted Average Cost of Capital (WACC)” that shows overall cost of capital that a company is presently bearing through the composition of debt, equity and other sources of capital for running of the business. The WACC is found by using the formula - 
WACC = (E/E+D) rE + D/(E+D) rD (1-TC)
Where,		E = Market value of equity; D = Market value of debt; rE = Cost of equity; 		rD = Cost of debt; TC = Tax rate
Cost of Equity
To calculate the Cost of equity, Capital Assets Pricing Model (CAPM) is used.
The Capital Asset Pricing Model (CAPM) is a linear relationship between the expected return on equity or Cost of equity and its systematic risk. Mathematically it is represented as
				Ke = Rf + β (Rm – Rf)
Where, E(r) = Expected rate of return on security; Rf     = Risk free rate of return; Rm  = Market return; β     = Beta of security.
Here,
Rf is taken as 10 years T-bond yield which is given as 1.70%
Market risk premium (Rm – Rf) is equal to 5% as given and Beta is given as 1.50
Therefore,
The Cost of Equity, Ke = 1.

Please prepare a write-up detailing the results of your analysis. You do not need to include a separate section detailing the background of the case in the write-up. Instead, focus only on the...

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