Company Valuation
Facebook IPO Valuation Method
In accordance to the Securities Exchange Commission (SEC) Registration Statement Form S-1, Facebook's Initial Public Offering (IPO) method of valuation encompassed considering several objective and subjective factors to ascertain their best estimate of the fair value of their Class B common stock. The factors included latest private stock sale transactions, historical financial results and projected trends, and projections for Facebook's future financial performance. There was also the factor of the performance and market position in relation to competitors and identical publicly traded corporations. Another factor was the economic and competitive setting, taking into account the industry in which Facebook operates and independent third-party valuations completed at the end of every financial quarter (Securities Exchange Commission, 2012).
The valuations of the Facebook IPO took into consideration the aforementioned factors and also employed a combination of financial and market-based methodologies to ascertain the firm's business enterprise value (BEV). One of the methods used was the Discounted Cash Flow Method (DCFM). This approach encompasses projecting the future cash flows of a company for a particular discrete time and discounting such cash flows to present value. The discount rate mirrors the risks intrinsic in the cash flows and the market rates of return accessible from substitute investments of identical kind and quality as of the valuation date (Securities Exchange Commission, 2012). A second method that was used in the IPO was the Guideline Public Company Method (GPCM). This method makes the assumption that businesses operating in the similar industry will have mutual features and that the subject's business will be in correlation to those features. The GPCM delivers an approximation of value by means of multiples resulting from the stock prices of publicly traded firms. The third approach is the Market Transaction Method (MTM). This methodology lays emphasis on the equity securities of the business or company being valued. In 2011, there were private stock sale transactions in Facebook's common stock. These transactions are considered if they take place with or amid prepared and unconnected parties. For Facebook's MTM approximations, all transactions were evaluated in the quarter with specific attention on transactions that are nearer in immediacy to the valuation date (Securities Exchange Commission, 2012).
Facebook's IPO price was botched from high anticipations and owing to a number of miscalculations. One of the miscalculations is that two days prior to the IPO, Facebook altered its decision regarding the number of shares it would offer. This caused an error simply because the key players that planned on buying shares on the IPO day had to recalculate all aspects and update their plans. In addition, several of the initial institutional
Alternative Valuation Method
A suggested alternative valuation method for Facebook is the price-earnings ratio. The price/earnings ratio (P/E) is the well acknowledged as one of the investment valuation indicators. Regardless of its shortcomings, the method is the most extensively reported and used valuation approach by investment experts and the investment public. The financial reporting of both firms and investment investigation services employ a basic earnings per share figure split into the existing stock price to calculate the P/E multiple (Loth, 2016). In this case, the price-earnings ratio method can be centered on projected future earnings. Through this measure of evaluation, the company's valuation is deemed to be in the midst of the other firms in comparison. In relation to its past performance, when using the company's price/earnings ratio, the common stock is perceived to be at the low-end of the trading market that investors have apportioned to it in the preceding three fiscal years (Loth, 2016).
Role of the Chief Executive Officer in Relationship to the Stock Performance
The Chief Executive Officer (CEO) plays a significant role in relation to the performance of the stock. In general, the CEO is responsible for the everyday running and operation of the firm, which plays a significant part on how the stock performs. In this case, the CEO of Facebook Inc., Mark Zuckerberg, maintains a majority of the voting power as the company has two classes of stock, Class A and Class B. As the CEO, he owns 50% of Class B common stock. It is imperative to note that shares of Class A are entitled to one vote for each share they hold; on the other hand, shares involving Class B are entitled…
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