Question

Having thought about Dr. John’s and Rent the Runway, let’s consider Facebook again. Jim Breyer agreed...

Having thought about Dr. John’s and Rent the Runway, let’s consider Facebook again. Jim Breyer agreed to value Facebook at $100 million in 2005 even though it only had five employees and modest revenues. Of the five people, only two were over 21.

Looking at the key determinants of options, what do you think was giving this option so much value? Pick one.

- Cost of the Option

- Expected Present Value of Potential Cash Flows

- Upside Volatility

- Time

- Interest Rates

Business   Operations-Management   
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Answer #1

Even though status of Facebook in 2005 was average with only 5 employees and modest revenues, there was future potential which Jim Breyer saw. This was because growth in revenues was expected due to rapid adoption of social media by the masses, leading to huge potential cash flows. The expected potential cash flows when discounted to present day (2005), increased the expected present value which led to a high valuation of Facebook at $10 million.

Hence, correct option is Expected Present Value of Potential Cash Flows.

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