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LINKEDIN CORPORATION Case Solution & Answer

However, the capital expenditure in the fiscal year 2006 is $240 million, which was increased to $259,784 in the fiscal year 2010. Thereafter, the depreciation has been added back to the EBITDA and these figures are taken from the Operations Data(Arumugam, 2007).

On the other hand, the increase in the net working capital has been incor

LINKEDIN CORPORATION Case Solution
LINKEDIN CORPORATION Case Solution

porated by deducting the current liabilities from a value of current assets. Furthermore, it has been assumed that the increase in the net working capital of LinkedIn takes place at a rate of almost 2.00%.

Although the income tax rate that is used in the valuation of the discounted cash flows is assumed to be 35.00%, which is then applied to the operating cash flows before tax. In addition, after deducting the income tax expense from the pre-tax cash flows, the value based upon the after-tax cash flows hasbeen obtained.

This value is based upon the time period of six years, which starts from the fiscal year 2006 and it ends in the fiscal year 2010. Despite this, the after-tax cash flows of LinkedIn are showing an increasing trend, which can be related to the increase in the fraction of the population that is making use of LinkedIn. However, as per the exhibits, it can be seen that in the fiscal year 2006 the after-tax cash flows are $248,939 and the after-tax cash flows in the fiscal year 2010 are $674,493.

In addition to this, the terminal value has also been incorporated by taking a growth of rate of 6.00% as per the case and the value of almost $14,053,086 has been obtained. The figure related to the terminal value has been obtained by applying a growth rate of 6.00% of the after-tax cash flows of the fiscal year 2010 and then by dividing it with the difference between the weighted average cost of capital and the growth rate of 6.00%.

However, the weighted average cost of capital as per the exhibits is almost 11.31% and this rate of return has been obtained by making a use of the capital asset pricing model. Hence, after dealing with the terminal value, the present value of cash flows isobtained.
Therefore, the present value of cash flows in the fiscal year 2006 is $248,939 and in the year 2010 after the incorporation of terminal value, the present value of cash flows is $14,727,580. Thereafter, positive NPV has been obtained, which represents the value of LinkedIn of almost $15,986,243.

However, in order to evaluate the share of these revenues, which are related to LinkedIn, they are taken into consideration on the basis of margin and the cost of capital. However, the weighted average cost of capital is calculated by taking account of the capital structure of LinkedIn.

In order to obtain the total market value of equity and debt, the market value of debt is achieved by dividing the total liabilities with the total liabilities and stockholder’s equity. Despite this, the proportion based upon the market value of debt is almost 49%, which seems to be an acceptable threshold.

This is becausethe percentage of debt of almost 50% is acceptable as well as the market value of equity is 51%, which is also a good sign that LinkedIn is relying mostly on its retained earnings thatwill result in the increased dividends being paid to the shareholders.

Moreover, the risk free rate of 5.93% has been assumed in the calculation of cost of capital and the market risk premium of 8.80% has been assumed to be incorporated in the calculation of weighted average cost of capital. However, the cost of debt of almost 6.93% has been obtained after adding 1.00% to the risk free rate………….

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