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1 Finance in the Media.

Read the article and consider the questions below.

Facebook Shares Available for Buy and Sell Before IPO

By BHASKAR PRASAD, February 23, 2012 5:25 AM EST

Facebook, which has filed the prospectus for its initial public offering (IPO) seeking to raise $5
billion in initial funding, is yet to set its price range for the IPO but buying and selling of its
stocks are already happening.

According to U.S. Securities and Exchange Commission rules, it is possible for insiders and
investors with $1 million of net worth and a salary of more than $200,000 can qualify to buy
stock on private marketplaces. Also in an auction last week on SharesPost, Facebook stock
traded for $42, valuing the company at $98 billion.

For instance LinkedIn Corp, two months before the IPO, was valued at $35 a share in private
trading in March 2011. Its IPO priced in May was at $45, giving it a valuation of $4.25 billion.
Shares more than doubled to close at $94.25 on the first day of public trading.

It is expected that demand for the IPO will push the stock even higher when Facebook, which
reported in the filing $1 billion in profit on $3.7 billion in revenue last year, goes public.

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Facebook first turned a profit in 2009, when it earned $229 million on $777 million in sales,
according to the filing. At the end of 2011, Facebook had $3.9 billion in cash and marketable
securities, up from $1.8 billion at the end of 2010.

In its IPO filing, Facebook revealed that it now has 845 million users, nearly half the world's
Internet users.

In addition, the S-1 filing revealed how dominant founder and CEO Mark Zuckerberg's control of
the company is with Facebook's structure of two classes of stock ownership and a highly
unusual arrangement that gives Zuckerberg 57 percent of the voting power of Facebook stock.

The Facebook founder owns 533,801,850 shares of stock. Based on the company's last
determination that those shares were valued at $29.73, his stake in the company would be worth
more than $15.8 billion. He also has options to buy 120 million more shares.

Facebook has seen its user base grow phenomenally over time. Now it has to be seen how its
share prices are going to grow with the advent of IPO.


1) What is a security?
A security is a financial instrument (claim) that can be traded in a formal secondary
market like the Australian Security Exchange (ASX).
Think about the difference between a term loan given to you by the bank (financial
instrument) and bond issued to you by a company (security). You can re-sell this bond
on a secondary market.
A financial instrument is a general term for any financial claim.

2) What is a stock?
A financial instrument representing an ownership stake (equity) in a company, which
entitles the investor to a share in the companys assets and profits.

So if I own 0.1% of the stocks on BHP I am entitled to a proportional 0.1% share in its
assets and profits.

Most stock also provides the investor with voting rights.

3) What is an IPO and what does it mean for a company to go public?

An IPO is an initial offering of shares to the public by a private company. Companies
offering an IPO may have existed for years but have finally decided to go public.
To go public means to become a listed company who can trade its shares on the stock
exchange. It means you are giving the public the opportunity to buy (subscribe to)
your shares.
A publicly traded company is one who has already issued securities which are now
being traded in the secondary market.
Facebook becomes publicly traded when it makes its shares available for the public to

4) What is a prospectus?
This is a document prepared by a company detailing the terms and conditions of an
issue of securities to the public.

5) What is the difference between private and public trading of stock?

Public trading of stock allows the public at large to buy company shares. Private
trading of stock only makes the shares available to a select number of investors:

...It is possible for insiders and investors with $1 million of net worth and a salary of
more than $200,000 can qualify to buy stock on private marketplaces.

6) If I buy shares in Facebook at this IPO and then re-sell them in the stock market what
type of transaction is this? Will Facebook raise any additional financing from this sale?

If I re-sell my shares this is a transaction in the secondary market. I am not creating a

new financial instrument- I am simply transferring ownership to someone else.
Facebook only raises funding when it issues shares into the market in a primary
market transaction. When investors trade these shares with each-other this is a
secondary market transaction which does not affect the amount of funding raised by
the company .
2. Scenario analysis:

Assume you have saved $10 000 and want to buy a car that costs $18 000.
a. What is your financial position before and after the purchase of the car?
You would be considered a surplus unit before the purchase of the car. Given that you have
saved $10 000, this must mean that your income consumption & investment was positive.
Should you decide to buy the car, then your savings would become negative by $8000 hence
your financial position would turn negative and you become a deficit unit.

3. Textbook Questions

Chapter 2

2. Suppose your great uncle decides to take this months savings and purchase a bond issued
by the Gateway Computer Company to finance an increase in computer components in their
new factory. Describe how this exchange could occur directly or indirectly using the flow-of-
funds framework.
Your great uncle is a surplus unit making funds available to the financial system and Gateway
is a deficit unit needing funds to finance their capital investment. If this were a direct
exchange in which your uncle arranged to purchase the bonds directly from the Gateway
Company there would be no financial intermediary involved. On the other hand the
transaction may have been indirect with an intermediary such as an investment bank actually
taking a position in the Gateway bonds and then selling them on to your uncle.

5. Suppose you invest in a real-estate development deal. The total investment is $100,000. You
invest $20,000 of your own money and borrow the other $80,000 from the bank. Who bears
the risk of this venture and why?
The $20,000 of my own money is considered the equity capital and the $80,000 is debt
financing. In general it is the equity investors who absorb the primary risk of business failure.
This is because if the business goes bankrupt, I will unlikely get any or my money back as the
debt holders get paid back before I do. However, the debt holder also faces some risk that it
will not even get back all its principal and interest. So lenders do share some of the
businessrisk along with the equity investors.