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Unformatted text preview: ex for your beta estimation, and market risk premium. For the risk free rate, use the three-month T-bill. Estimate the levered beta for each of the comparable firms using the monthly returns data I provide. Use only years 2009, 2010, and 2011. Delever each beta according to each firm's capital structure at fiscal year-end 2011. Estimate an industry average beta based on the set of comparable companies you think are appropriate (justify your choice). Use this unlevered industry average beta for Facebook, assuming that Facebook will not choose to have debt in its capital structure. Choose what you think is an appropriate market risk premium. Justify your choice. Cost of debt: using the same set of comparable firms as above, calculate the mean or median borrowing rate. One method is to simply take the interest expense divided by long- term debt, but you can choose an alternative method provided you justify the method. Unlevered cash flows: Forecast Facebook's unlevered cash flows for at least ten years. Your forecast will require growth assumptions, which may change over time. In my valuation I consider three distinct growth periods: 1-5 years, 6-10 years, and 11-20 years. You can do the same if you like, or you can choose something different. To help establish your growth rates, complete the first table in the DCF worksheet using all 13 comparable companies. In particular, for each calendar year from 2005 through 2011, calculate industry and average company growth for Sales, EBITDA, and capital expenditures (CAPEX). Use the mean/median growth rates for to help guide your analysis. You may also consider looking at the growth at a particular comparable company to augment this analysis. After you establish your unlevered cash flows, consider how to treat investments in working capital and capital expenditures to. These will need to be deducted from your unlevered cash flows, and they may not grow at the same rate as your earnings. Think carefully about this. Once you have settled on a stream of operating cash flows (sometimes also called free cash flows), discount them back (using the WA...
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