Urban Face Inc. is a social media company that currently has 10 million users but...
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Accounting
Urban Face Inc. is a social media company that currently has 10 million users but reported an operating loss of $5 million on $10 million revenues in the most recent year, mostly from advertising. The company expects revenues to grow 80% a year for the next 5 years and its pre-tax operating margin to improve to 20% of revenues by year 5. After year 5, you expect the revenue growth to drop to 10% a year for the following 5 years and the margins to stay stable. (The company has no debt and no cash balance.)
You have run a regression across more established advertising companies to arrive at the following regression
EV/Sales = 0.80 + 45.0 (Expected annual revenue growth in the next 5 years) + 25.0 (Pre-tax Operating Margin) - 1.5 (Earnings Loss Dummy)
where the earnings loss dummy is set equal to one if the company is reporting an operating loss and zero if it is not.
Now, assume that the cost of equity for Urban Face is 15% for the next 5 years and 10% beyond.
Estimate how much new equity (in PV terms) the company will have to issue over the next 5 years. (You can assume that the company will have a 20% debt to capital ratio at the end of vear 5.)
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