Question

Question 27:

[Venture Capital Valuation Method] A venture capitalist firm wants to invest $1.5 million in your NYDeli dot.com venture that you started six months ago. You do not expect to make a profit until year four when your net income is expected to be $3 million. The common stock of BioSystems, a “comparable” firm, currently trades in the over-the-counter market at $30 per share. BioSystems’ net income for the most recent year was $300,000 and the firm has 150,000 shares of common stock outstanding.

- Apply the VC method to determine the value of the NYDeli at the end of four years.

Comparable’s EPS = ?

Comparable’s P/E = ?

Venture’s projected value at year 4 = ?

- If VCs want a 40% compound annual rate of return on similar investments, what is the present value of your NYDeli venture?

Present value = (Value @ year 4) / (1 + r)⁴ =   ?

- Based on the pre-money value, what percentage of ownership of the NYDeli dot.com venture will you have to give up to the VC firm for its $1.5 million investment?

Ownership = ?

- Based on the post-money value, what percentage of ownership of the NYDeli dot.com venture will you have to give up to the VC firm for its $1.5 million investment?

Owernership = ?

Answer 1

a. Given,

Earning=$300000

Price=$30 per share

No. of Share=150000

Comparable EPS=Earning/No. of Shares

=300000/150000

=$2

P/E Ratio=Price per share /Earning per share

   =30/2

   =15

Venture's Projected Value (at year 4)= Earnings x P/E Ratio

   =$300000x15

   =$4500000

b.Present Value of NYDeli Venture=Value at year 4/(1+r)⁴

   =4500000/(1.4)⁴

=$1171386.92

c. Pre-money value Ownership=33.33%

d. Post-money Value ownership=25%