Balance Sheet A) Using the 2012 Annual

Balance Sheet

a) Using the 2012 Annual Report, which reflects the fiscal year ended December 31, 2012, Facebook lists short-term liabilities on its balance sheet of $1.052 billion, split between several categories. The largest of these is the accrued expenses, followed by the capital lease obligations. The long-term debt on the company's balance sheet is $1.50 billion with the total long-term liabilities being $2.296 billion.

b) The market capitalization of Facebook is $107 billion, according to Yahoo Finance.

The debt ratio of the company, using the book value of the company's equity, is 3348 / 15103 = 22.1%. The debt-to-equity ratio is 3348 / 11755 = 28.6%.

For short-term liabilities only, the STL Debt ratio is 1052 / 15103 = 6.9% and the STL/Equity ratio is 1052 / 11755 = 8.9%. The LTD debt ratio is 2296 / 15103 = 15.2% and the LTL/Equity ratio is 2295 / 11755 = 19.5%.

I would consider these ratios to be the right size for Facebook. There are a few reasons for making that assessment. The first is that Facebook is a young company with relatively uncertain cash flows. That implies that it should take a conservative view of debt, and not keep too much of it on the books. Facebook has a relatively low amount of long-term debt (just $1.5 billion vs. A market cap of $107 billion). This is not only a hedge against cash flow volatility but also frees up cash for investing in growth. While debt is relatively cheap, it is recommended that Facebook carries a minimal amount of debt on its books. At this point, it has more cash than long-term debt, which indicates that the company is only carrying that debt because it was able to borrow at a very low cost, something that both Google and Amazon have also done in the past couple of years to lower their cost of capital. At this point, I consider Facebook to have a healthy amount of debt, well within the prescribed range. It should neither pay off its debt nor should it acquire more.

3) The debt-to-equity ratio of Google is 0.30, while the debt-to-equity of Yahoo is 0.17, according to Yahoo Finance. The debt to equity ratio of Facebook is right in line with that of Google, but both of these are higher than that of Yahoo. Therefore it is reasonable to conclude that there is nothing unusual with the amount of debt that Facebook is carrying. In fact, like Facebook, Google took out some debt that it didn't need specifically to bring its capital structure to that point. Yahoo has not made a similar move. Both Google and Facebook appear to want to realize the benefits of having more debt in their capital structure (lower cost of capital). Yahoo, in contrast, has maintained a very low debt to equity ratio perhaps because it recognizes that there is something inherently strange in borrowing money that it does not need -- all three companies have a fair amount of cash/long-term investments on their books.

4) This module has taught me to analyze the balance sheet, and investigate and think critically about the capital structure of firms. I have looked at Facebook and determined that it has an appropriate level of debt for the type of business in which it is engaged, and where the company itself is along the corporate growth cycle. I was able to perform the same calculations with Google and with Yahoo and came to the same conclusions about both of those companies.

Optimal capital structure strikes the balance between using debt to lower the cost of capital and the constraints that debt places on operations. Firms must strike a balance between these two things, and for each firm that balance is going to be different. Ideally, the firm should take on as much debt as possible without constraining its ability to grow. Facebook has a high level of growth, so it needs to maintain a fair bit of cash, and the same can be said of Google. Yahoo might have a more mature business, so can handle a little bit more debt. Being able to come to that determination is something that I have learned in this module -- how to identify and evaluate the different factors that go into determining a firm's optimal capital structure.