March 6, 2012

In the last tutorial we had started discussing regarding the valuation of Facebook. We had released a simple template for valuing equity of Facebook.

Today I give you simple hints on using discounted cash flow analysis (DCF) for valuation purpose, and you should try to use it in finding the DCF Valuation for Facebook on your own.

## What is DCF?

It is a method of valuing a company, using the future free cash flows discounted at the cost of capital to arrive at its present value (PVs).

#### Most Common Free Cash Flow Definition:

Free Cash Flow to Firm (FCFF) = NI + NCC + Interest *(1 â€“ tax) â€“ FInv â€“ WInv

Free Cash Flow to Equity (FCFE) = NI + NCC – FInv â€“ WInv + Net Borrowing

Where,

NI = Net Income

NCC = Non â€“ Cash Charges

FInv = Fixed Capital Investment (capex)

WInv = Working Capital Investment

## Calculating Cost of Capital

Weighted Average Cost of Capital = Wd * After Tax Cost of Debt + (1 â€“ Wd) * Cost of Equity

Cost of Equity = Risk Free Rate (Rf) + Beta *(Return from Market (RM) â€“ Rf )

#### Sources for getting the required inputs for calculating cost of capital

Beta can be calculated by un-levering the beta of the comparable company and then re-levering the beta for the subject company using its debt equity ratio. In our case Facebook has very minimum debt in its book and this is the same case with the majority of the social networking and internet giants, so we can directly take the average of the comparables to calculate the beta for Facebook.

I am sure after looking at todayâ€™s post you can easily value Facebookâ€™s equity.

What do you think should be the value of Facebook??

## Next Steps

2moro we will provide you the filled valuation layout. Till then try to do the valuation of Facebook on your own.

## Enroll for the entire Facebook Valuation Program here!

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