Answer to question no-(1)

Discuss about the Conversation Analysis of Asynchronous Decentralized Media.

With the ramified economic changes, each and every company should follow proper capital structure. In this report, proper financial analysis of Facebook Company has been used to evaluate the financial performance and capital structure of company before and after issue of Initial public offer. It is the best method to raise the funds which is also used as tool to strengthening brand image of company on international level. In this report, share price analysis, evaluation of the financial performance of company and the capital structure analysis of company has been taken into consideration.

The strategic milestone of the Facebook Corporation was to issue of the initial public offers in market to raise the funds. This strategy was used to arrange the possible funding for the business for the operational activities with its expanded business. This strategic milestone was to arrange the capital at the lowest price and finance its operating and its managerial activities (Facebook Corporation., 2016).

There are several advantages of IPO of Facebook Corporation which are given as below.

By using the cash inflow comes from the IPO of company, Facebook began its extensive work on the superior social networking platform together with its business mates.

This big amount of investment in its operational activities increased the overall outcomes and efficiency of the business at large (Facebook Corporation., 2012).

After issue of the IPO, Facebook had the increment of the 88% annual growth which strengthens its busienss in long run.

The initial amount of cash inflow from the IPO allowed Facebook to invest its capital in making various strategic alliances such as it acquired the Instagram portal and purchased various advance busienss units which could be used to set up strong cyber computing mechanism (Facebook Corporation., 2012).

The IPO of Facebook also strengthens the corporate brand image of company on international level (Facebook Corporation., 2012).

The main pitfall which is associated with the IPO was related to increased compliance program. Facebook had to face the technical issue in its IPO as the error in the NASDAQ’s trade processing system delayed the debut by 30 minutes which resulted to the hand trading among 30 minutes. In addition to this, Facebook also had to comply with the international stock exchange rules and regulation. It had to face high amount of penalties at the beginning which resulted to increased cost of its services. The main impact of the poor market performance was also seen due to the stock debut by social giant’s catastrophic understanding and that is the same denoted by the Kayak and Vkontakte.

Advantages of IPO of Facebook Corporation

With the expanding busienss and increased growth was the major factor for Facebook to go public. However, it was observed that the private ownership of company exceeded 500 shareholders by 2011 and as per the securities exchange listing rules, if a company is having more than 500 shareholders over $ 10 million in its assets are required to adopt the same financial disclosure practice as adopted by listed companies. In addition to this, increased investment in the infrastructure and research and development required high amount of investment. This was the biggest motivation for the Facebook to invest capital in IPO (Facebook Corporation., 2012).

There are several ways available for the Facebook to raise funds for its business such as issue of bonds and debentures, taking consideration from other organizations for the mutual collaboration, government intervention capital investment and bank loans.

It is observed that when company go for the debt funding then it will have to follow the proper compliance program and needs to take approvals from the several stakeholders. After analyzing the annual report of Facebook, it could be inferred that company was already having high amount of debt funding in its busienss. It is observed that if company raises more funds by using the debt funding in its busienss then it will negatively impact the sustainability of company. The financial leverage of company is based on the debt portion in its capital structure.

Yes, IPO was the best suitable choice to raise the funds. Company had to use the IPO to raise the funds with a view to maintain the effective financial leverage. In addition to this, with the international expanding, by using IPO, Facebook strengthen its brand image on international level (Facebook Corporation., 2012).

After evaluating the busienss growth of the Facebook, it is inferred that company has high growth in its business due to the high attraction of its creative busienss among the people on international level. The financial securities market has reflected that high risk and return available on the securities is based on the financial performance of companies undertaken in the portfolio (Facebook Corporation., 2012).

Therefore, it could be inferred that with the increased business growth rate of Facebook, it should invest IPO proceeds in its research and development department and business expansion at large (Kwok, and Yu, 2013).

It is right to say that company does not raise $ 16 billion capital from its IPO.

Pitfall associated with the IPO of Facebook

Explanation

It was seen that due to the highly depressed financial market in 2012, Facebook had to go for the initial public offer to raise the funds for its business operiatons. However, the IPO undertaken by Facebook raised $ 16 billion capital but due to increased charges of underwriting commission and legal issuing charges, company received only around 15.52 billion capitals from its IPO. Facebook had to pay high amount of capital to underwriters for underwriting of the shares, payment to brokers and securities listing fees to stock exchange (Kwok, and Yu, 2013).

As per the Facebook’s 1 filling, the shares of the company are broadly classified into two main classes which are principally identical except for one key difference.  The IPO offered in Class A was for the 15.5 % ownership (180000000 shares of Class A amounting to $ 157415352). 

The primary purchaser of these Class-A are all the underwriters who entered into the underwriting agreement with the Facebook. The name of the primary purchaser of Class-A are JP Morgan, Goldman Sachs, Barclays and Bank of America Merrill Lynch (Kwok, and Yu, 2013).

It is observed that share of company is broadly classified into two main classes named Class-A and Class-B.

Shareholders might feel that the value of the shares purchased by the Class-B is sold to Mark Zuckerberg. However, he was kept at the priority to buy the class-B and no one other was allowed to buy the shares of Class-B.  It might affect their investment decision due to the discrimination made in the IPO offered by company (Wilson, Gosling, and Graham, 2012).

It is true to say that if company wants to secure its IPO investment then it will have to enter into strategic alliance with the underwriters for the underwriting of its shares (Galloway,  2011).

There are several Key tasks executed by Underwriters in the undertaking IPO of Facebook.

These underwriters JP Morgan, Goldman Sachs, Barclays and Bank of America Merrill Lynch will ensure that firm satisfies all the legal and regulatory requirement such as filling, deposits of the fees and other mandatory financial data.  They also undertake the pulse of prospective of buyers and recommend the IPO price to Facebook. In addition to this, underwriting guarantee is also given to company if the shares are not bought by the public in market (Bourdaillet, et al. 2016).

The main primary consideration while selecting the underwriters is related to their market rating. The Facebook indulged in raising more than 16 billion capital therefore, the paid capital and nature of these underwriters needs to be of secured banks who could have enough capital to buy shares if public does not  buy shares (Doring,  2013).

Motivation to go Public

It is observed that most of the capital investment in business is accompanied with the high amount of cash outflow. It might be hard for the one single underwriter to give underwriting to buy IPO if shares are not purchased by public. Therefore the main motivations of syndication of the underwriters were based on the high cash outflow and complex legal and regulatory compliance (Kandel, Sarig, and Wohl, 2013).

There are several ways of promotion of the shares in the market such as conducting seminars, using banners and online marketing to attract public to invest their capital in the particular stocks. Underwriters reflected the positive financial performance of Facebook in long run which attracts most of the public to invest capital in business.  It is analyzed that Facebook during its IPO selling had to face the high decrease in its revenue growth which negatively impacted the share price movement of company and resulted to negative outlook in public mind. The main reason of dislike the outlook revision of financial performance of Facebook was related to its impact on the share price movement (Viviani, Giorgino, and Steri,  2008.

The performance of Facebook after its debut on May, 8th, 2012 was flabbergasting. Many of the biggest investors criticize the investment of the people in Facebook. The main negative factor was related to the estimation of the right value of the shares of Facebook in market. It was analyzed that when the shares of the Google were having PE ratio of 17 and Apple was having 13 PE ratios then at the same time, Facebook was having 67 PE ratio which was unbelievable in context with the existing market condition. These types of announcement in the annual report of Facebook increased the doubt of the people at large on international level.

As per the listing agreement, investors who invested their capital in the Facebook by buying shares in IPO could liquidate their shares only after certain period of time (Habib,  and Ljungqvist,  2011).

It is observed that Prof. Damodaran undertakes the valuation method in which revenue of Facebook was selected and the growth rate was computed by using the trend analysis. After deducing the entire cash outflow, He determined the future cash inflow which Facebook would be having. Afterward, the present value factor was used to determine the actual value of the future cash inflow. In addition to this, project escalation amount had also been deducted by the Prof. Damodaran to determine the actual cash inflow in business. After that on the basis of cash inflow and amount of total capital of business, Prof. Damodaran determined the actual share price of company at large (Facebook Corporation., 2012).  The determination of the market price of company has shown that company will reduce its overall earning throughout the time.  It is analyzed that the approach followed by the underwriter was not correct. It is analyzed that Class-A shares are issued to public whereas Class B shares are issued to private owners and employees of the company. It is analyzed that underwriters should have given underwriting guarantee to buy the shares which are issued to shareholders if in case they do not buy (Vogel, 2014).

Why was it relatively easier for Facebook to raise capital from the stock market over the debtunding?

As per the valuation method shown by Prof. Damodaran, it is inferred that company will be having 400% growth rate throughout the year. The total base revenue will be $ 37711 billion which will consistently increased with the increase in its overall income (Robins,  2013).

Revenue	3711	Growth	Yearly 400%	Increased growth each years
Total terminal value	$ 9023 million	Value of equity	$ 7055 million	Estimated value= $ 28
Market price of the shares	38	Overvalued	Overvalued	Overvalued

As per the valuation method given by the Prof. Damodaran in the exhibit, it is analyzed that Facebook has overvalued its shares in market which might result to less increment in the share price in the upcoming years (Facebook Corporation., 2012).

Therefore, it could be inferred that underwriting Class-B shares was not right approach to give the underwriting guarantee to company (Baños-Caballero, García-Teruel, and Martínez-Solano,  2014).

Particular	Facebook	Apple	Google	Wal-Mart
PE	67	13.7	17.2	12.7
Revenue (Total value in USD $ billion)	3.7	142.4	39.9	446.9
Free cash flow (Total value in USD $ billion)	1.46	83.29	27.29	37.82

It is evaluated that the share prices of the Facebook have been determined on the basis of the future cash inflow and revenues earned by the company. Prof. Damodaran uses the all the revenue of the company and determined the growth rate of the Company for identifying the future cash inflow. After that, present value factors and discounted cash flow method is used to determine the present value of future benefits. By using the PV factors and comparable company analysis have also been used to evaluate the PE ratio of Apple and Google. It was analyzed that as compared to other companies, PE ratio of Facebook is 68 which is 300% higher as compared to other companies (Facebook Corporation., 2012). However, it was feasible but was justified by using the growth rate and increased profitability of company (Bodie, Kane, and Marcus, 2014).

This above table reflects that Facebook is more strengthen company and reflecting higher PE Ratio as compared to its other rivals in same social media industry.

The share price analysis of Facebook shows that company has increased its share price movement by 500% as compared to last five year data. As per the valuation methods used by Prof. Damodaran, it was predetermined that the share price movement will increase by only 50% in upcoming five years based on the discounted cash flow methods which will eventually add value on its investment (Facebook Corporation., 2016). The increased business outcomes and growth rate had increased the growth rate of business positively (Ehrhardt, and Brigham,  2016).

The short term performance of Facebook could be analyzed by using the liquidity position of Facebook.

The current ratio of Facebook was 10.71 points in 2012 before the IPO. After that, current ratio increased to 12.92 points in 2017 which eventually increased due to the increased current assets.  This shows that company has increased its investment in current assets (Fiordelisi, and Mare, 2014).

IPO prospectus, Facebook provides information on the ‘Use of proceeds’

The quick ratio of company is equal to the current ratio of Facebook as company has zero amount of investment in its inventory.

It is analyzed that the long term performance of company has been analyzed by evaluating the debt to equity capital of company. The debt to equity of Company was .02 points in 2012 which increased to .10 points in 2017. It shows that company increased its investment in the long term liabilities and equity portion (Guerrieri, and Lorenzoni, 2017).

After evaluating the annual report of company, it is analyzed that company went for issue of the $ 400 million Employees stock option scheme and its impact on the financial performance of Company (Facebook Corporation., 2012).

It is observed that company issued $ 400 million Employees stock option scheme which eventually lower down its financial leverage and increased the cash inflow. It increased the overall investment in its current assets which will positively impact the busienss expansion and increased business growth in very short span of time. In addition to this, it will establish the nexus between the employees growth with the organizational development at large.

The financial performance of company will be positively impacted as company does not have to pay interest and other expenses which will eventually increased the overall net profit earning and profitability of company (Iacoviello, 2015).

The capital structure of company is accompanied with the debt and equity capital of company.

Years	2012	2013	2014	2015	2016	2017
Debt	1322	1325	2664	3264	2892	6417
Equity capital	15250	15470	36096	44218	59124	74347
Debt to equity	.01	.012	.005	.002	.001	.0014

After analyzing the debt to capital structure of company, it is assessed that Facebook had .01 debts to equity capital structure. Company has lower down its debt to equity capital by increasing the overall equity portion. It is analyzed that company maintained very low amount of debt which increased the overall cost of capital of business. However, presently, company does not have high financial leverage. If in near future, Facebook wants to raise funds for its business then it could do so by issue of bonds and debentures in market (McCracken, . and Ng, 2016).

Conclusion

Facebook is one largest social network listed in 2012 after that it came up with the initial public offer to raise the funds from the public. It used IPO method to raise funds. It is the process to raise the funds from the market by issue shares for the first time. However, Facebook has increased its value of its investment throughout the time by consistent development and economic growth at large.

References

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Bourdaillet, J.J.L., Peng, W., Sun, T. and Szymanski, M.H., Xerox Corp, 2016. Conversation analysis of asynchronous decentralized media. U.S. Patent 9,330,422.

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Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.

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