Analysis of Facebook's Stock Performance and Capital Structure

This report provides a comprehensive analysis of Facebook's financial performance from its IPO in May 2012 to December 2018. It begins by calculating and analyzing the yearly stock performance, including average and annual returns, highlighting the impact of the initial public offering and subsequent market fluctuations. The report then calculates the holding period return for an investor who purchased shares at the IPO and sold them at the end of 2018, demonstrating the overall investment gains. Furthermore, the analysis delves into the possible explanations for Facebook's performance, focusing on investor perception, revenue generation through marketing and data mining, and the company's unique position in the internet business sector. The report also examines Facebook's leverage ratio, capital structure policy, and estimates the yearly cost of equity and cost of capital, providing insights into the company's financial stability and investment attractiveness.

Running head: CORPORATE FINANCE
Corporate Finance
Student Name:
Student Number:
Authors Note:

ACCOUNTING THEORY AND APPLICATION
Table of Contents
Question 1:.................................................................................................................................2
a. Analyzing the yearly stock performance of Facebook following its IPO:.............................2
b. Analyzing the holding period return for this investment period:...........................................2
c. Analyzing the possible explanations for the performance of Facebook during the period:...3
Question 2:.................................................................................................................................4
a. Analyzing the leverage ratio of Facebook for each financial years:......................................4
b. Analyzing the capital structure policy of Facebook over this period:...................................4
c. Estimating the yearly cost of equity and cost of capital of Facebook:...................................5
References and Bibliography:....................................................................................................6

ACCOUNTING THEORY AND APPLICATION
Question 1:
a. Analyzing the yearly stock performance of Facebook following its IPO:
Yea
r Average return Annual return
2012 -0.15% -23.77%
2013 0.31% 77.22%
2014 0.17% 41.95%
2015 0.13% 32.25%
2016 0.06% 15.76%
2017 0.17% 42.84%
2018 -0.09% -23.57%
The stock performance of Facebook is relatively evaluated by analyzing the prices of
the shares from 2012 to 2018. The stock performance of the organization is relatively
calculated in the above table, which presents the average returns during the year and the
annual returns. From the analysis, it could be identified that after its initial public offering
Facebook overall share value increased and provided higher returns to the investors, which
gradually declined due to the low changes in share price. The analysis of the table helps in
detecting that the highest yearly returns that was provided by Facebook was in 2013 after
which the annual returns range from 15% to 45% in annual basis. The calculation has mainly
used the Arithmetic Average Returns instead of Compound Annual Returns, as it helps in
detecting the change in share price performance, which can be used by the investors while
making investment decisions (Huang et al. 2015).
b. Analyzing the holding period return for this investment period:
Particulars Value
Bought shares on 18 May 2012 38.23
Sold shares on 28 December
2018 133.20

ACCOUNTING THEORY AND APPLICATION
Holding period return 248.42%
The information in the above table directly highlights about the holding period return
for the investor that has bought the shares of Facebook during 18 May 2012 and sold it
during 28 December 2018. The total holding period return is at the levels of 248.42%, which
depicts about the total increment in share value of Facebook, which has been achieved in 6
years. The share value of the organization has relatively increased from the initial closing
price of 38.23 to 133.30 in the duration of 7 years. This improvement is relatively indicating
about the improvement in share value, which was achieved by Facebook due to the increment
in demand from investors (Investor.fb.com 2019).
c. Analyzing the possible explanations for the performance of Facebook during the
period:
The possible explanation for the performance of Facebook during the period is
relatively based on the perception of investors regarding the valuation of the organization.
From the analysis of the annual report and the changing share price valuation of Facebook, it
will be identified that the uniqueness of the business opportunity as a relatively allowed the
investors to value the company at a higher price than its initial public offering. The company
is relatively based on internet business, which heavily relies on data produced by the uses of
Facebook. The company has been generating high level of revenues through different
marketing schemes and data mining processes. The uniqueness of the operations that is
conducted by Facebook is relatively allowing the organization to achieve high level of net
income over the period of 7 years, where the profits of the organization increased from the
levels of $53 million in 2012 to $22,112 million in 2018. This drastic increment in net
income by 41,620.75% in 7 years has raised the expectation of the investors and boosted the
demand of its shares in the capital market (Investor.fb.com 2019).

ACCOUNTING THEORY AND APPLICATION
Question 2:
a. Analyzing the leverage ratio of Facebook for each financial years:
Particulars 2018 2017 2016 2015 2014 2013 2012
Debt - - - 114 233 476 2,356
Equity
84,127
74,347
59,194 44,218 36,096
15,470
11,755
Debt-to-equity ratio 0.00% 0.00% 0.00% 0.26% 0.65% 3.08% 20.04%
The calculations in the above table directly indicate about the overall change in
leverage ratio of Facebook during the period of 7 years. The calculation is directly indicated
that leverage ratio of the company is a relatively at the levels of 0%, as the organization is
mainly focused on equity capital and has zero debt capital. The transition to the debt free
organization was relatively smooth, as the company was able to minimize their debt exposure
after its initial public offering and reduce it to the levels of 3.08% in just one year. The
enormous revenue and net income that was generated by Facebook after its IPO allowed the
company to eradicate its debt and use equity capital for its operations (Campbell, Galpin and
Johnson 2016).
b. Analyzing the capital structure policy of Facebook over this period:
The current capital structure of Facebook is mainly based on equity capital. Thus, it
could be understood that the company's overall capital structure condition is positive where
the chances of insolvency through debt accumulation is nil. Capital structure of Facebook in
comparison to its competitors is relatively superior, as other competitors maintain minimum
amount of debt to support its capital requirements, whereas Facebook has eradicated all debt
exposures in their capital to enhance their financial strength and reduce any chance of
insolvency (Robb and Robinson 2014).

ACCOUNTING THEORY AND APPLICATION
c. Estimating the yearly cost of equity and cost of capital of Facebook:
Particulars 2018 2017 2016 2015 2014 2013 2012
Debt 0 0 0 114 233 476 2356
Interest
expense 0 0 0 23 23 56 51
Interest rate 0.00% 0.00% 0.00% 20.18% 9.87% 11.76% 2.16%
Particulars 2018 2017 2016 2015 2014 2013 2012
Market return 15.30% 25.10% 13.40% 7.00% 7.50% 26.50% 7.30%
Risk free rate 2.56% 2.23% 2.02% 1.73% 1.72% 1.71% 0.72%
Beta 1.07 1.07 0.94 0.94 0.95 0.95 0.95
Cost of equity 16.19% 26.70% 12.72% 6.68% 7.21% 25.26% 6.97%
Particulars 2018 2017 2016 2015 2014 2013 2012
Debt - - - 114 233 476 2,356
Equity 84,127 74,347 59,194 44,218 36,096 15,470 11,755
Total 84,127 74,347 59,194 44,332 36,329 15,946 14,111
WD 0.00% 0.00% 0.00% 0.26% 0.64% 2.99% 16.70%
WE 100.00% 100.00% 100.00% 99.74%
99.36
% 97.01% 83.30%
cost of debt 0.00% 0.00% 0.00% 20.18% 9.87% 11.76% 2.16%
cost of equity 16.19% 26.70% 12.72% 6.68% 7.21% 25.26% 6.97%
Tax 13.00% 23.00% 18.00% 40.00%
40.00
% 46.00% 89.00%
Cost of capital 16.19% 26.70% 12.72% 6.70% 7.20% 24.70% 5.85%
The information in the above table directly provides the calculation of cost of equity
and cost of capital of Facebook from 2012 to 2018.because of capital of organization is
considered to change for the period of 7 years due to the eradication of debt and utilization of
only equity capital to support its operations. The cost of equity has been derived by using the
capital asset pricing model, which helps in analyzing the market return, risk free rate and beta
of Facebook to determine the actual cost of equity for the organization (Barberis, N.,
Greenwood, Jin and Shleifer 2015). The beta has been used for the Dow Jones Industrial and
Facebook, where risk free rate from Daily Treasury Yield Curve Rates is used and the
performance of Dow Jones Industrial has been used for deriving the cost of equity with the
help of CAPM formula.

ACCOUNTING THEORY AND APPLICATION
References and Bibliography:
Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative
capital asset pricing model. Journal of financial economics, 115(1), pp.1-24.
Bloomberg.com. 2019. Bloomberg - Are you a robot?. [online] Available at:
https://www.bloomberg.com/quote/INDU:IND [Accessed 24 Sep. 2019].
Campbell, T.C., Galpin, N. and Johnson, S.A., 2016. Optimal inside debt compensation and
the value of equity and debt. Journal of Financial Economics, 119(2), pp.336-352.
Huang, D., Jiang, F., Tu, J. and Zhou, G., 2015. Investor sentiment aligned: A powerful
predictor of stock returns. The Review of Financial Studies, 28(3), pp.791-837.
Investor.fb.com. 2019. Facebook - Financials . [online] Available at:
https://investor.fb.com/financials/default.aspx [Accessed 24 Sep. 2019].
Nasdaq.com. 2019. FB. [online] Nasdaq.com. Available at: https://www.nasdaq.com/market-
activity/stocks/fb [Accessed 24 Sep. 2019].
Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The
Review of Financial Studies, 27(1), pp.153-179.
Treasury.gov. 2019. Daily Treasury Yield Curve Rates . [online] Available at:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/
TextView.aspx?data=yieldYear&year=2012 [Accessed 24 Sep. 2019].