CP Venture Partners is looking at the possible investment of $ 1 million in an early-stage company (Startco). Given the stage of the investment, CP requires a 40% annual rate of return. The company earned $ 750,000 in EBITDA last year, and this amount is expected to grow at a rate of 30% per year over the next five years. Companies like Startco are currently being valued at five times EBITDA, and CP Venture Partners thinks this is a reasonable multiple for the valuation of the firm in five years.
a. Assuming that Startco currently has no debt and does not plan to borrow over the next five years, what do you estimate the enterprise value of the company will be at the end of five years? b. What fraction of Startco does CP Venture Partners need to own at the end of five years in order to realize the required rate of return on its investment?