You are trying to value Toktik a social network in the early stages of its development.Income is
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Question:
• The (expected) number of users in year 1 is 190 millions. The growth of the userbase from year 1 to year 2 is 25% and then declines by 2.5% every year (i.e., growth
is 22.5% from year 2 to 3, 20% from year 3 to 4 etc). When growth reaches 0%, itstays at 0.
• ARPU in year 1 is €3. The ARPU's growth is 5% from year 1 to year 2 and thendeclines by 1% every year (i.e., growth is 4% from year 2 to 3, 3% from year 3 to 4etc). When growth reaches 0%, it stays at 0.
• User servicing costs are €0.80 per year per user, constant over time.
• User acquisition cost is €10.00 per user. This is a one-time cost incurred in the yearthe user joins the network. If the network has X users in year N − 1 and Y usersin year N, assume that X-Y users joined in year N (for simplicity, we do not modeluser attrition). 40 million users joined in year 1.
• Overhead costs are m€60 in year 1 and grow like the user base.
• CAPEX is m€100 in year 1 and grows like the user base. Capital expenditures aredepreciated linearly over 4 years (i.e., 25% of the CAPEX of year N is depreciatedin years N + 1 to N + 4). To simplify, assume that Toktik's assets in place beforeyear 1 are not depreciated.
• Net working capital is 2.5% of sales. It was m€8 in year 0.
• Corporate tax rate is 30% and net operating losses can be carried forward.
Derive Toktik's unlevered cash-flows for years 1 to 10.
2. Facebook has an equity β of 0.86 and a leverage L = −0.02. Twitter has an equitybeta of 0.91 and a leverage L = 0.06 (assume their net debt carries no systematic
risk). The long term (30-year) risk-free rate is 3.06% and the market risk premiumis 5.5%. Assume that Toktik's unlevered cash-flows grows at 3% per year after year10. Compute Toktik's equity value if Toktik has a leverage of 0.
3. Suppose now that Toktik has leverage L = 0.3 constant over time (everything elseis as before). Compute Toktik's equity value.
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