Description
University of Queensland
FINM2415 Corporate Finance
“Capital Structure and Corporate Valuation” Assignment
Semester 2, 2023
Basic information:
Due date for the assignment: Friday 6 October 2023, at 14:00 (Brisbane time)
Due date for peer assessment : Friday 6 October 2023, at 17:00 (Brisbane time)
Total marks : 20 marks
Weight : 20% of the overall course grade
Type: This is strictly a group assignment.
FINM2415 – CORPORATE FINANCE – GROUP ASSIGNMENT QUESTIONS
Assume that you are a team of financial analysts, your task is to analyze Meta Platforms, Inc. (formerly Facebook, Inc.) using your knowledge of corporate finance. The company’s initial public offering (IPO) was on 18 May 2012 so stock price and accounting data are available from this date. You are required to perform analyses for the following two questions:
Question 1
1.1. Calculate annual leverage ratios (debt/total assets and debt/equity) for Meta for each financial year during the period from 31/12/2012 to 31/12/2022.
1.2. Select two comparable companies with Meta, which are in the same industry with Meta (GICS code 5020) and have total assets similar to that of Meta in year 2012 (their total assets can be higher or lower than that of Meta but close) and calculate annual leverage ratios (debt/total assets, debt/equity) for each of these two companies.
1.3. Compare debt/total assets and debt/equity ratios of Meta with each of these two companies and comment on any differences.
1.4. Using your knowledge on capital structure theories, discuss the capital structure policy of Meta since its IPO as well as of the two comparable firms.
Guidelines:
- Step 1: Go to the University of Queensland’s library website and search the business database: Osiris [Bureau van Dijk] , in “Companies” tab, enter the search term “Meta”, then look for the folder name “Financial data/Global detailed format”, then click on Export Tab nearly on the top row of the web page to download all data on both Balance Sheet and Income Statement of Meta Platforms, Inc. You will get the data and save them in your computer.
- Step 2: Calculation:
o Debt = Current Portion of Long-term (LT) Debt + Current loans & overdraft + Other Short Term Debt + Total LT Interest Bearing Debt
o Equity = Total Sharehoders Equity
- Step 3: Find comparable firms
o Click again the “Companies” tab and remove the earlier search for Facebook by click on the symbol X in the SEARCH STRATEGY
o Then look for “Industry” Tab and click “Global Industry Classification Standard”, and double click on the Folder of 50. COMMUNICATION SERVICES” and select 5020 Media & Entertainment and Click OK. The search results will show the total number of firms in the industry, then click “View list of results”, then click the last column label “Add”, and click “Financial Data” folder/Global detailed format/Industrial Companies/Assets, then select Total Assets and click OK, then select Absolute periods and year 2012 and click OK, then OK, after this process you will see a list of firms in the same industry with Meta and their total assets in 2012.
Select two comparable firms where their total assets are close to that of Meta in 2012.
- Step 4: Calculation for comparable firms: Repeat Step 1 and Step 2 for these comparable firms.
Question 2
2.1.Using monthly data for Meta since its IPO date to 31/12/2022, estimate equity beta for Meta. Compare your estimate of Meta’s equity beta with the Facebook’s beta provided by Yahoo Finance and comment on any differences.
Guidelines:
– Go to Yahoo Finance (finance.yahoo.com/), then enter search term “Meta”, then click on “Historical Data” and get monthly prices (AdjClose) of Meta for the required period, and use this information to calculate the monthly return series for Meta.
– Go to Yahoo Finance (finance.yahoo.com/), then enter search term “S&P500”, then click on “Historical Data” and get monthly data (AdjClose) of S&P for the required period, and use this information to calculate the monthly market return series.
– Go to Yahoo Finance (finance.yahoo.com/), under the “Markets Tab”, you will find US Treasury Bonds Rates, then look for Treasury Yield 10 Years (listed symbol “TNX”) then click on “Historical Data” and get monthly data (AdjClose) of TNX for the required period, and use this information to calculate the monthly risk-free rate series.
– Use Excel to estimate Meta’s equity beta. You will need to report the summary output of the regression in the report.
2.2. Assuming that beta you estimated in 2.1 is the true value of Meta’s equity beta, estimate the cost of equity for Meta for each financial year during the period from 31/12/2012 to 31/12/2022. Comment on your estimate.
2.3. Estimate the cost of debt for Meta for each financial year during the period from 31/12/2012 to 31/12/2022. Comment on your estimate.
Guideline: The cost of debt can be calculated as financial expenses/debt.
2.4.Estimate pre-tax WACC and WACC for Meta for each financial year during the period from 31/12/2012 to 31/12/2022. Comment on your estimate.
Guideline: The tax rate can be calculated as Income taxes/Earnings before tax
2.5. Estimate free cash flow for Meta for each financial year during the period from 31/12/2012 to 31/12/2022. Estimate yearly growth rate of free cash flow and the average of the yearly growth rates of free cash flow for the entire period. Comment on your estimate.
2.6. Assuming that in the future, free cash flow of Meta will grow at the average growth rate estimated in 2.5 and Meta will maintain its debt to equity ratio and cost of capital estimated in 2.4 for 31/12/2022, estimate firm value for Meta at 31/12/2022. Comment on your estimate.
2.7. Estimate free cash flow to equity for Meta for each financial year during the period from 31/12/2012-31/12/2022. Estimate yearly growth rate of free cash flows to equity and the average of yearly growth rates of free cash flow to equity for the entire period. Comment on your estimate.
2.8. Assuming that free cash flow to equity of Meta will growth at the average rate estimated in 2.7 and Meta will maintain its cost of equity estimated in 2.4 for 31/12/2022, estimate the Meta’s equity value at 31/12/2022. Comment on your estimate.
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