Elon Musk’s Twitter Deal Case Study

 Using the information provided in Twitter’s 10-K form, estimate a reasonable revenue growth rate and cost of capital for the company. Develop your estimates based on historical trends, market dynamics, and broader industry conditions. Some relevant data is provided in the accompanying Excel file, but additional information may need to be sourced independently through online research. Clearly outline your assumptions of revenue growth rate and cost of capital and provide your reasoning to justify your chosen rates. Next, utilize the accompanying Excel valuation template to calculate Twitter’s value as of April 22, 2022. Analyze how sensitive the valuation results are to changes in the revenue growth rate assumptions. Discuss the implications of this sensitivity when assessing the deal. Does this acquisition represent a good deal for Elon Musk? Why or why not? 

This is the main task of the assignment. Using the link for the 10K report and with the help of the given formulas you need to file a report and calculate everything in an excel file.

Foundations for Finance

OVGU
Assignment: Elon Musk’s Twitter Deal Case Study

This assignment in attachment is voluntary, and you will receive a bonus point for
submission and good performance. Please submit your answer report in PDF format,
along with the corresponding Excel file in xlsx via elearning.
Deadline: Feb

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6,

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025 at 23:59

Q. Twitter, founded in 2006 by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams,
launched its platform later that year. The company went public on the New York
Stock Exchange on November 7, 2013. Unlike many other tech companies, which grant
founders or early investors greater voting power through multi-class share structures,
Twitter adopted a single-class share structure, ensuring all shares had equal voting
rights.

On April 25, 2022, Elon Musk signed an agreement to acquire all outstanding shares of
Twitter for $54.20 per share in cash, valuing the company at approximately $44 billion.
Below is a timeline of key events related to the deal:

Twitter’s management argued that Musk’s offer undervalued the company.

Now please analyze this transaction. You can refer to Twitter’s 2021 10-K annual
report, available on the SEC’s website at this link (https://www.sec.gov/Archives/
edgar/data/1418091/000141809122000029/twtr-20211231.htm).

Answer to questions below:

(a) Evaluate Twitter’s response to Musk’s takeover attempt. Could the company have
taken a stronger takeover defense? If so, how?

1

https://www.sec.gov/Archives/edgar/data/1418091/000141809122000029/twtr-20211231.htm

https://www.sec.gov/Archives/edgar/data/1418091/000141809122000029/twtr-20211231.htm

(b) Using the information provided in Twitter’s 10-K form, estimate a reasonable rev-
enue growth rate and cost of capital for the company. Develop your estimates
based on historical trends, market dynamics, and broader industry conditions.
Some relevant data is provided in the accompanying Excel file, but additional in-
formation may need to be sourced independently through online research. Clearly
outline your assumptions of revenue growth rate and cost of capital and provide
your reasoning to justify your chosen rates. Next, utilize the accompanying Excel
valuation template to calculate Twitter’s value as of April 22, 2022. Analyze how
sensitive the valuation results are to changes in the revenue growth rate assump-
tions. Discuss the implications of this sensitivity when assessing the deal. Does
this acquisition represent a good deal for Elon Musk? Why or why not?

Note: To simplify, assume

EBIT = Revenues ∗ Operating Margin;
FCFF = EBIT ∗ (1− t)−Reinvestment;

Reinvestment = (Current Year Revenues − Previous Year Revenues)
×Sales-to-Capital Ratio;

Value of firm = PV(next five years’ FCFFs) + PV(terminal value)

where terminal value =
FCFFyear5 × (1 + g)

(r − g)
, PV (terminal value) =

terminal value
(1 + r)5

and Value of equity = Value of the firm − Debt − Minority interest + Cash +
Non − operating assets.

2

2

>Input sheet and cash flows (DCF

8

Advertising

%

.93%

=

.64%

Read from 10-k

outstanding =

25.00%

for the following 5 years

Insert your estimate here and write your reasons in report

=

-Reinvestment

= Value of the firm

– Minority interest + Cash

of the first five years. Then use growing perpetuity formula given above to get the PV(terminal value)

1
2
3
4
5

Revenue growth rate

0.00%
0.00%
0.00%
0.00%
0.00%

Revenues

$ – 0
$ – 0
$ – 0
$ – 0
$ – 0

20.00%
20.00%
20.00%
20.00%

EBIT

25.00%
25.00%
25.00%
25.00%
25.00%
25.00%

EBIT*(1-t)
FCFF
Cost of capital

0.00%
0.00%
0.00%
0.00%
0.00%

1
1
1
1
1

PV(FCFF)

$ – 0

– Debt
$ 5,546.60

$ – 0

+ Non-operating assets
$ – 0
Value of equity

Number of shares
– 0

Date of valuation

Mar-

1

Company name

Twitter

Numbers from your base year below ( in consistent units)

Updated on January 2022 with 2022 Industry averages

Country of incorporation

United States

Industry (US)

Advertising

Industry averages.

Industry (Global)

Most recent 10-k annual report (in million dollars)

Note

Report page number

Industry (US data)

Industry (Global data)

Revenues

Read from 10-k

Revenue growth in the most recent year =

7.1

3

4

Operating income or

EBIT

$ 273.00

Cost of capital

5

7.00%

Interest expense

$ 152.90

Book value of equity

Book value of debt

$ 5,546.60

Number of shares

797.60

Current stock price =

$ 42.00

Effective tax rate =

25.00%

Marginal tax rate =

The value drivers below (Assumptions):

Revenue growth rate

Insert your estimate here and write your reasons in report

Operating Margin for the following 5 years

2

0.00%

Market and company numbers

Riskfree rate

2.50%

Cost of capital (WACC)

Standard deviation on stock price =

30.00%

Sales-to-Capital Ratio

2.80%

Annually

perpetual growth rate of FCF (g)

4.00%

Note: To simplify,

EBIT=Revenues* Operating Margin

FCFF

EBIT*(1-t)

Reinvestment = (Current Year Revenues − Previous Year Revenues) × Sales-to-Capital Ratio

Value of firm = PV(next five years’ FCFFs)+PV(terminal value)

where terminal value=FCFF_{year5}*(1+g)/(r-g) and PV(terminal value)=terminal value/(1+r)^5

Value of equity

– Debt

+ Non-operating assets

Forecast for the next 5 years using your estimated revenue growth rate and cost of capital for this five years. After that, Free Cash Flow each will grow at 4% growth rate, the cost of capital will be the same as the previous years

Hint: you can first calculate the sum of

PV(FCFF)

Base year

Terminal Value

$

– 0

Operating margin

19.02%

20.00%

Tax rate (t)

– Reinvestment

Cumulated discounted factor

Value of the company

Value of debt is 5546.6 million dollars

– Minority interests

+ Cash

$ 6,393.70

Value of cash is 6393.7 million dollars

Value of equity= Value of the firm – Debt – Minority interest + Cash + Non-operating assets

– Value of options

$17.91

Value of options is 17.91 million dollars

Value of equity in common stock

Estimated value /share