2012H2 FIN101 XC04, XC05, XC06

XC04 – Difference between Berkshire Hathaway Class A & B stock

Class A: Voting 1/1, Dividend 1/1, Convertible into 30 Class B

Class B: Voting 1/200th, Dividend 1/30th

XC05 – Show that P and D grow at g

Solution is here -> DDM_P_and_g

XC06 – Facebook net cash flow approximation vs. cash flow statement number

NCF = net income – non cash revenues + non cash charges

NCF ~ net income + depreciation and amortization

The numbers for Facebook vary from site to site.  They also appear to vary over time.  The accounting at Facebook is questionable.  Nevertheless, the main item driving the difference between our net cash flow approximation and the operating cash flow number is the large amount of “share based compensation.”

In Facebook’s income statement there are costs.  Some of those costs were paid not with cash but with Facebook stock certificates.  This is similar to our government printing money.  🙂  Looking at FB’s statement of cash flows,In the nine months ending September 30 2012 we see 1.388B in “share based compensation” compared to $425M in depreciation and amortization.  However, note that FB’s income statement does not include depreciation and amortization.

In conclusion, FB’s numbers are questionable.  Depreciation and amortization is not the largest non-cash item for FB.The NCF approximation differs from the net cash flow from operations number primarily due to “share based compensation.”  FB pays people with stock certificates rather than cash.  Seems like the game Monopoly to me.

2012H2 FIN101 XC03 – Lowpoint coffee example

Lowpoint coffee’s after-tax cash flows are currently $100,000 annually but will grow at 3% indefinitely.  With a 15% discount rate how much should Starbucks offer to takeover this mom-and-pop coffee shop assuming a 15% discount rate?

Using the present value of a growing annuity formula:

Internally, Starbuck’s knows this is what Lowpoint is worth.  However, upper management would like to offer $750,000 instead.  At what interest rate can a $750,000 offer be justified?  Just rearrange the PVA formula a bit: