Verified Document

Finance Assessing A Potential Investment In Facebook Essay

Finance Assessing a Potential Investment in Facebook

Under the concept of time value, money today is worth more than the same amount in the future (Nellis and Parker, 2006). This is over time, inflation will erode the value of money and in a years time $100 will buy less than it will buy today. If Facebook is offering a $100,000 bond, for one year, the investor, wanting to make a profit and account for the money that could be made elsewhere, will offer less that the face value.

Using the CAPM, shown in question 2, to allow for the time value of money, the interest rates I may get elsewhere and the risk associated with Facebook investments, the price I would pay is $86,333. However, if I were risk adverse I may want to discount this even further to a gain a higher risk premium, as there are other indicators of risk, such as a low profit margin and return on assets and equity, however the cash flow appears good in the current and quick ratios (see table 2).

Question 2

To assess how much one may pay for a bond it is necessary to look at the rates that may be obtained elsewhere and account for the risk that is involved. A good tool to assess the required rate of return is the capital asset pricing...

This is a simple formula, where the expected rate of return is calculated by taking the current risk free rate (usually the 10-year government bonds) and then adding to that the equality risk premium multiple by the beta. The equality risk premium is the additional amount that the stock market averages, and the beta is a measure of the share price volatility, usually interpreted as indicating risk, the equation is written like this E (R) = r + (ERP x b).
The current risk free rate is 2.88% (Bloomberg, 2013) and we will assume that the current equity risk premium is 7%. The beta for Facebook is 1.85 (Yahoo Finance, 2013). This gives us the following equation 2.88(7 x 1.85) = 15.83. This is the expected rate of return. This can now be used to discount the bond.

The equation to discount the future value is PV = FV / (1+r) n where PV is the present value, FV is the future value ($100,000 in this case), r is the discount rate (15.83% in this case) and n is the number f years (1 in this case). This gives 100,000/(1+15.83)1 = 86,333

Question 3

The price an investor is willing to pay will vary by company, and reflect the firms' performance as well as the investor beliefs. Looking at other firms…

Sources used in this document:
References

Bloomberg (2013) U.S. Generic Government 10-Year Yield, retrieved 16th September 2013 from http://www.bloomberg.com/quote/USGG10YR:IND

Nellis JG, Parker D, (2006), Principles of the Business Economics, London, Prentice Hall.

Yahoo Finance, (2013), Facebook Inc., retrieved 16th September 2013 from http://finance.yahoo.com/q/ks?s=FB+Key+Statistics

Yahoo Finance, (2013), Google Inc., retrieved 16th September 2013 from http://finance.yahoo.com/q/ks?s=GOOG+Key+Statistics
Yahoo Finance, (2013), SINA Corp., retrieved 16th September 2013 from http://finance.yahoo.com/q/ks?s=SINA+Key+Statistics
Cite this Document:
Copy Bibliography Citation

Related Documents

Analyzing Social Media and Facebook
Words: 4182 Length: 14 Document Type:

Facebook Kaplan and Norton (1993) introduced the balanced scorecard as an implement for management that enables the effective execution of strategies prompted by an organization. The Balanced Scorecard supports the employment and management of all company activities in harmony with their strategic inference. This is done by connecting organizational activities that are non-financial and functioning with fundamental chains to the organization's long-term strategy. The balanced scorecard's four perspectives include: the financial

The IPO of Facebook and It's Stock Performance
Words: 1734 Length: 5 Document Type: Essay

Company Valuation The valuation and method used to determine the Initial Public Offering (IPO) value of Facebook stock was based on numerous factors. First, it was a much-hyped IPO, with retail investors seeking to get in on the action that venture capitalists had already secured years prior through private investment. Everything connected in one way or another to Facebook was receiving attention, even Zynga, the one-hit wonder PC-game producer. Second, the

Forecasting Return and Spillover with GARCH's
Words: 12377 Length: 48 Document Type: Essay

57 Spillover Effect on the Stock Market and Bond Prices in Relation with GARCH Abstract This study examines the spillover effect between bond and stock markets in the U.S. using GARCH. The finding of a unidirectional spillover flow from bonds to stocks in the U.S. is discussed in the light of new marketplace variables that have been introduced into the markets in the previous decade. These variables include the rise of HFT, algorithm-driven

International Crisis on Businesses. In This Paper,
Words: 2510 Length: 8 Document Type: Essay

International Crisis on Businesses. In this paper, I will assume the task of a consultant at McKinsey and Co. It is my duty to analyze the effects on international and local businesses of the problems which are erupted in Middle Eastern/Northern African countries particularly Egypt, Tunisia and others. This paper will be produced for the clients of McKinsey and Co in order to assist them in their respective strategies for

Nestle Is a Large Scale Multinational Corporation
Words: 2900 Length: 10 Document Type: Essay

Nestle is a large scale multinational corporation engaged in manufacturing a wide variety of food, beverages, and health care products. It was incorporated in 1866 by Henry Nestle in Switzerland as a small food manufacturing company. At present, Nestle is present in all the corners of the world and serves its customers with thousands of food and beverage brands for all types of consumers. It manufactures products for all types

Google Introduction and Description of the Company
Words: 6398 Length: 22 Document Type: Essay

Google Introduction and Description of the Company Organizational Structure Industry Analysis Value Proposition Financial Performance Figure 1.1 Revenue and Net Income Growth TOWS Strategies BCG Matrix Leadership Alliances Measures Google is a highly successful Internet company that makes most of its money through online advertising. It has been able to achieve this success through a combination of leadership and culture. The company's many strengths are in general aligned with the opportunities that exist in the marketplace. As a result, Google has the

Sign Up for Unlimited Study Help

Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.

Get Started Now