Old Alfred Road, who is well-known to drivers on the Maine Turnpike, has reached his seventieth birthday and is ready to retire. Mr. Road has no formal training in finance but has saved his money and invested carefully.
Mr. Road owns his home—the mortgage is paid off—and does not want to move. He is a widower, and he wants to bequeath the house and any remaining assets to his daughter.
He has accumulated savings of $180,000, conservatively invested. The investments are yielding 9% interest. Mr. Road also has $12,000 in a savings account at 5% interest. He wants to keep the savings account intact for unexpected expenses or emergencies.
Mr. Road’s basic living expenses now average about $1,500 per month, and he plans to spend $500 per month on travel and hobbies. To maintain this planned standard of living, he will have to rely on his investment portfolio. The interest from the portfolio is $16,200 per year (9% of $180,000), or $1,350 per month.
Mr. Road will also receive $750 per month in Social Security payments for the rest of his life. These payments are indexed for inflation. That is, they will be automatically increased in proportion to changes in the consumer price index.
Mr. Road’s main concern is with inflation. The inflation rate has been below 3% recently, but a 3% rate is unusually low by historical standards. His Social Security payments will increase with inflation, but the interest on his investment portfolio will not.
What advice do you have for Mr. Road? Can he safely spend all the interest from his investment portfolio? How much could he withdraw at year-end from that portfolio if he wants to keep its real value intact? You do NOT need to provide specific calculations, but explain how you would do the necessary calculations to advise Mr. Road using the concepts presented in the current and previous weeks.
Since 2005, Facebook has enjoyed spectacular success. By all accounts it is the most successful social media website. From initial funding by Mark Zuckerberg and Eduardo Saverin, to Angel Investors, to Accel Investment and Microsoft infusion of $240 million, Facebook grew to a staggering valuation by Goldman Sachs of an amazing $50 billion.
There seemed to be no end to the profitability and growth (over 900 million users) to Facebook. To increase profitability and raise additional capital for expansion of its current technology and purchase of other threats/opportunities such as Instagram, Facebook made the decision to file for an Initial Public Offering (IPO) on February 1, 2012. This long-awaited announcement gave investors hope that the underwriter value of their shares ($38 each and pricing the company at around $104 billion) would see stock valuation increase immediately, as Linkedin (+109%); Groupon (+31%); and Pandora (+9%) did on their first day of public trading. Clearly, this seemed to be an easy bet—nothing seemed to be able to limit the quick opportunity to make profit for the investor.
However, the appreciation that investors hoped for did not materialize. In fact, as of July 17, 2012, Facebook stock price was at $28.09, roughly $10 per share less than its initial IPO price only 4 months earlier. The events that led to this disappointment have left major shareholders skittish and investors weary. To restore confidence in the investment potential of the company, further actions will obviously be necessary.
For this assignment, you are tasked with writing a letter to the Board of Directors. Taking on the position of the CEO, your letter must be convincing so the Board has restored confidence that you are in touch with the issues and can take the necessary steps to significantly enhance valuation.
Carefully explain your perspective on the IPO. From whose perspective was the IPO a failure and why? From whose perspective was it a success and why? (This will require some research on your part.)
What is your strategy for quickly restoring value and increasing the stock price?
What is your longer term strategy e.g., diversification, additional cash flows from proposed new programs or projects? (Using what you learned in Week 2, project the future value of any investments you recommend.)
Using what you learned about specific and market risk in Module 4, how can investor risk be minimized?
Be sure to employ convincing statistics and/or figures to support your arguments. You can make up numbers for your calculations on diversification and new programs/projects, but your answer must be logical and consistent with what you’ve learned in the course.
For example, if you recommend a new project that would enhance shareholder value, you need to consider and calculate the opportunity cost of that action.
Write your letter in standard business letter format to the Facebook Board of Directors. Your letter is not to exceed 8 pages in length, with a precise Executive Summary at the beginning and a compelling conclusion at the end.