Once Grant has established a value for perspective. Of course, investors will be an investment. They will also want to determine how much of the firm?s shares they need to acquire to command that return. Grant expects that early-stage investors will want to earn a return of 30% to compensate for the risk. The rate of return reflects the investor?s perceptions of the economic, industry, and company-specific risk factors. It also accounts for the alternative investments available. Grant thinks that 30% will be adequate compensation for the risks associated with investing in a new, untried venture like New Tech?s growth plan.

Grant explains that investors will evaluate the percentage of shares they require by looking at the potential return at exit, i.e., at the end of the investment period. This exit might be achieved through an IPO, a sale of the whole company, a buyback or redemption of the investors? shares, or other means. The investor will be getting a percentage of the value of New Tech?s shares at the exit and will want to be sure that the percentage is high enough for them to hit their rate of return target of 30%. Grant?s initial assessment is that New Tech will fall short of an expected 30% after-tax return on investment for its investors. If that is so, they will need to alter their offering somehow to accommodate investor demands, possibly the percentage of shares they will offer. But first he explains how the calculations are done.

Grant starts with the assumption that potential investors would likely want to exit around 2017.1. Assuming that the investors own 30% of New Tech?s shares at the time of exit and that the 2017 value would be three times the 2017 EBITDA, what would be the value of the firm in 2017?2. What would be the investors? share of the 2017 value?

3. What would be the return on a $1 million investment in the company today at that valuation?

4. Is your calculated return adequate? If not, how can it be made acceptable to investors?

Transcribed Image Text:

Valuation: Survey of Methods Sales Cost of goods Sold¹ Gross margin Operating expenses Selling expense Administrative expenses Total operating costs Operating income Taxes (34%) Net income Table 5.8 New Tech's Financial Forecast ($, 000s) Working capital Accounts receivable Inventory Accounts payable Net working capital Capital spending 'COGS includes depreciation of the amounts to the right 2012 Actual 2013 Forecast 2014 2015 2016 2017 3,000 3,900 6,700 8,040 1,185 1,560 2,077 2,412 1,815 2,340 4,623 5,628 857 555 1,412 403 109 294 450 350 550 250 1,326 702 2,028 312 106 206 546 429 585 390 1,100 325 4,700 5,640 1,645 1,805 3,055 3,835 1,316 1,410 1,474 1,528 752 846 1,005 1,206 2,068 2,256 2,479 2,734 987 1,579 2,144 2,894 336 537 $729 984 651 1,042 $1,415 1,910 $658 733 $470 564 $658 620 470 677 804 740 500 500 375 400 430 871 1,045 670 804 737 884 965 500 490 To Do Calculate the value of New Tech today, using the data given in Table 5.8 and the preceding assumptions. Valuation: Survey of Methods Sales Cost of goods Sold¹ Gross margin Operating expenses Selling expense Administrative expenses Total operating costs Operating income Taxes (34%) Net income Table 5.8 New Tech's Financial Forecast ($, 000s) Working capital Accounts receivable Inventory Accounts payable Net working capital Capital spending 'COGS includes depreciation of the amounts to the right 2012 Actual 2013 Forecast 2014 2015 2016 2017 3,000 3,900 6,700 8,040 1,185 1,560 2,077 2,412 1,815 2,340 4,623 5,628 857 555 1,412 403 109 294 450 350 550 250 1,326 702 2,028 312 106 206 546 429 585 390 1,100 325 4,700 5,640 1,645 1,805 3,055 3,835 1,316 1,410 1,474 1,528 752 846 1,005 1,206 2,068 2,256 2,479 2,734 987 1,579 2,144 2,894 336 537 $729 984 651 1,042 $1,415 1,910 $658 733 $470 564 $658 620 470 677 804 740 500 500 375 400 430 871 1,045 670 804 737 884 965 500 490 To Do Calculate the value of New Tech today, using the data given in Table 5.8 and the preceding assumptions.

Answer rating: 100% (QA)

EBITDA Earnings before interest taxes depreciation and amortization Calculation of EBITDA for FY 201... View the full answer