The document presents a comprehensive financial analysis of Facebook Inc., including key ratios and comparisons with competitors like Google, Microsoft, and Yahoo from 2011 to 2013, highlighting metrics such as return on equity, profit margins, and asset turnover. It also discusses stock ratios, capital asset pricing model (CAPM), and weighted average cost of capital calculations, revealing insights into Facebook's valuation and cost of debt. Additionally, the document compares operating cash flows and market capitalization among the companies analyzed.

1. FACEBOOK INC.
Financial Analysis

2.  Full version:
https://www.facebook.com/zuck/posts/1010125093077
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3. INDUSTRY ANALYSIS
MINI GAME:
 Count the total apps on your smart phone.

4. DUPONT ANALYSIS
Key Ratio Analysis 2013 2012 2011
ROE (Return on Equity) 10.95% 0.31%
Return on Asset 8.33% 0.17% 10.85%
ROFL 2.62% 0.15%
Profit Margin 35.70% 10.57% 47.32%
Asset Turnover 0.48 0.47 1.17
Times Interest Earned 50.18 10.55 41.81
Solvency Ratio 112% 1% 53%
Debt-to-Equity 16% 28% 33%
Net Working Capital
$ 11,970,000.00 $10,215,000 $3,705,000
Current Ratio 11.88 10.71 5.12
Quick Ratio 11.46 10.26 4.96

5. COMPETITORS
Key Ratio Analysis in 2013
FB GOOGL MSFT YHOO
ROE (Return on Equity) 10.95% 16.20% 30.10% 10%
Return on Asset 8.33% 12.60% 16.60% 7.77%
ROFL 2.62% 3.60% 13.50% 2.23%
Profit Margin 35.70% 20.40% 34.70% 29.19%
Asset Turnover 0.48 0.62 0.48 0.27
Times Interest Earned 50.18 160.36 78.44 45.23
Solvency Ratio 112% 58.50% 43.71% 54.75%
Debt-to-Equity 16% 27% 80.42% 14.10%
Net Working Capital
$ 11,970,000.00 $ 56,798,000.00 $ 64,049,000.00 $ 36,850.00
Current Ratio 11.88 4.63 2.71 11.4
Quick Ratio 11.46 4.3 2.66 11.4

6. STOCK RATIO ANALYSIS
Stock Ratio Analysis (April 24, 2014) FB GOOGL MSFT YHOO
Market Cap
156.9 179.9 330.5 35.6
Stock Price per Share (200 days MA)
60.87 549.43 39.86 35.24
EPS (Earning per Share) (TTM) 0.79 18.41 2.71 1.21
P/E Ratio
78.01 29.19 14.66 29.19
P/B (Price-to-Book ratio)
10.07 3.95 3.87 2.83
Price/ Sales
19.87 5.82 3.95 7.82
PEG Ratio (5 year expected) 1.55 1.27 1.55 2.69
Outstanding Shares 2.55 0.67446 8.3 1.03
Operating Cash Flow 4.22 19.42 28.19 1.12
Beta 1.77 1.1 0.69 1.13
P/CF
36.78 19.08 11.74 32.41

7. EQUITY VALUATION
 DDM or CAPM valuation
 No Dividend  No DDM
 CAPM:
 RFB = rf + bFB * (rM – rf) = 2.67 + 1.77 * (7.32 –
2.67) = 10.90%
*We will use the yield on 10-year US Treasury bonds, because it’s very unlikely to
default. As of the time this paper is written, the risk-free rate is 2.67% (United
States Government Bonds, 2014). We will use 10 year average of S&P 500 Index as
expected market return, which has the value of 7.32% as of today (S&P 500 Index,
2014)
 ROI: 8.33%
  Overvalued

8. WEIGHTED AVERAGE COST OF CAPITAL
 Cost of debt
 Cost of debt (before tax) is usually the corporate bond rate of
company’s bond rating. Since Facebook currently has no bond, we will
assume that Facebook will receive an “A” bond rating from Standard
and Poors or Moody.
Cost of debt = Risk-free rate + Credit Spread = 2.67 + 0.52 = 3.19
(Credit spread using data from (Composite Bond Yields Table, 2014))
 Current tax rate: I will use data from Facebook’s income statement in
2013
Tax rate = Taxes / Earning before Taxes = $1,254,000 / $2,754,000 =
48.71%
 Cost of debt (after tax) = cost of debt (before tax) * (1 – Tax rate)
= 3.19 * (1- 48.71)= 1.64%
 Cost of equity: we already calculate this in part III.5 as 10.90%
 Weighted cost of capital. We use data from Facebook’s balance
sheet in 2013.
 Debt percentage: $2,425,000 / $17,895,000 = 0.1355
 Equity percentage: $15,470,000 / $17,895,000 = 0.8645
 Weighted cost of capital = 0.1355 * 1.64% + 0.8645 * 10.90%
= 0.22% + 9.42% = 9.64%

9. ACQUISITIONS
 Source: http://techcrunch.com/2014/02/25/the-age-of-acquisitions/

10. HISTORICAL PRICE CHART

11. PRICE-EARNINGS RATIO FORECAST FOR
FB STOCK
 Source: Nasdaq

12. RECOMMENDATIONS