Question

PLASE HELP!

Problem 3 (15 points) Jim Jacobs is negotiating with a Venture Capital Fund for $ 3 MIL financing for his new venture Jim is the sole founder and owns 100% of the company's equity. He is adamant that he must keep a 60% interest in the company after external capital is raised. A VC investor believes an 8X return in NLT 6 years is an appropriate return for the risk associated with this investment. The company has just begun generating revenue, and it does not expect to generate positive Cash Flow (CF) until Year 3. Discrect Cash Flow projections prepared from pro forma financial statements are presented below. After the discreet forecasting period (Yr 4), Rick and the VC expect CFS to grow by 2.5% per year in perpetuity Cash Flow S -1,800,000 $ 1,000,000 Year 2,750,000 $ 9,000,000 4 A. What imputed rate of return is being demanded by the investor? (2) Given the required rate of return calculated in A. above, what value would the VCs give to projected Discreet Period pro forma CFs? (3) B. C. What is the firm's Terminal Value (TV) (not the PV of the TV) in Year 42 (3) D. What is the TOTAL Present Value of the firm? (3)

Answer 1

A

Imputed rate of return is given by the below formula:

Imputed rate of return = ((Final Value/Initial Value)^(1/number of years)-1)*100%

As per the second last and the last line of the first paragraph, the VC expects 8x returns in 6 years.

So,

Final Value/Initial Value = 8

Number of years = 6

Plugging these numbers in the formula, we get:

Imputed rate of return = 41.42%

B. Refer to the below table for B, C & D:

Year 1 2 3 4 Comment Projected Cash Flow -1,800,000 -1,000,000 2,750,000 9,000,000 PV of Projected Cash Flow -1,272,792 -500,000 972,272 2,250,000 Discount Rate is the Imputed Rate of Return Value (Discreet Proforma Cash Flows) 1,449,480 Terminal Value (in $) 23,701,641 Perpetual Growth rate 2.50% Imputed rate of return (as calculated in the previous question) 41.42% PV of Terminal Value ($) 5,925,410 Value ($) 7,374,890 Calculated as the sum of PV of Terminal Value and PV of projected cash flow

Value (Discretionary Period Cash Flow) = 1449480

Formula for PV = C/(1+r)^n

C = Cash Flow in the nth year

n = number of years

r = Imputed rate of return

C.

Formula Used for Terminal Value = Cn*(1+g)/(r-g)

Cn = Discretionary Cash Flow for the nth year.

g = perpetual growth rate

r = imputed rate of return

Terminal Value = $ 23,701,641

D.

Value ($) = 7,374,890