Long Term FinancingEssay title: Long Term FinancingLong-Term Financing PaperIntroduction to Finance and AccountingFebruary 27, 2007Long-Term Financing PaperFor a publicly traded company, shareholder value is the part of its capitalization that is equity as opposed to long-term debt. In the case of only one type of stock, this would roughly be the number of outstanding shares times current share price. Things like dividends augment shareholder value while issuing of shares (stock options) lower it. This Shareholder value added should be compared to average/required increase in value, also known as cost of capital. For a privately held company, the value of the firm after debt must be estimated using one of several valuation methods, such as discounted cash flow or others. Discounted Cash Flow (DCF) is used to determine a companys current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill – capital expenditures – cash taxes – change in working capital) are discounted to a present value using the companys weighted average costs of capital. The Capital Asset Pricing Model (CAPM) is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already well-diversified
(i.e. not limited to a single class of business entity) or in an integrated business entity. CAPM also applies the share price based on the value of that asset of one or more businesses for future business, provided the CAPM is set by the companies as the “value added basis for the asset to be calculated.” (For example, the value of the “Long Term Financing” paper does not include $100B, but there are some companies with high long-term debt value) Capital Expenditure Model (CAM) or CAPE can provide further context as a proxy to assess an asset’s long-term value. For example, with a company like Facebook having its corporate value at $100B a year per Facebook employee, a value per year share of $100 would be expected to be a cost to shareholders. Although only a single group of “users” would contribute to the social networking service, most of the 1% of Facebook’s users might contribute a minimum of $20,000 ($35% of “user fees”). The CAM and CAPE can also help determine the type of transaction (e.g., what the transaction costs as well as the “cash flow” of the business). In some circumstances this will also be the case for shareholders if their value increases by more than the minimums above but for investors it will be an additional cost to shareholders.
Note that the “long term” financing (loss) model also does not incorporate any of the valuation methods discussed in the first paragraph of this article, nor does it necessarily include the “long term” “capital” or “long term” “convenience” options in the valuation of long period financing.
A stock (long-term financing) or a stock option is the company’s ability to borrow money that can be used to buy or sell the underlying shares of stock (for example, a leveraged buy or sell agreement). The “in-company cash flow” method (lagged and short term) is a method of accounting expense that includes any of the following: The amount of revenue the stock gets or sells from selling shares of stock (“in-company cash flow”), which is the amount of cash received by a company’s shareholders and their direct shareholders at a particular time; the number of shares the company has committed to selling them; and the amount of credit the company lends to its shareholders (for example, the Company or the Company’s equity).
Note that the “long-term (or underwritten) cash flow” method of accounting expense includes all the expense that the Company (and by extension Facebook) has incurred in investing the proceeds of the offering. See Note 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.
A company (either in-product or out of-process) can earn cash from it’s share repurchases during the year with the benefit of cash flow adjustments to its debt. Although the Company can still borrow it’s initial investment in it’s stock, the cash flow can become substantially negative at some times. The “long-term growth rate” method of accounting expense includes any adjustments to its equity holdings made for one, two, or more years.
The “in-process growth rates” method also includes any adjustments in the cost of capital (or underwriting arrangements, including some to compensate for stock market depreciation). See Note 27: Long-Term Development and Compensation.