The Biometrix Corporation has been in operation for one full year (2019). Financial statements follow. Biometrix’s management is interested in determining the value of the venture as of the end of 2019. Sales are expected to grow at a 20 percent annual rate for each of the next three years (2020, 2021, and 2022) before settling down to a long-run growth rate of 7 percent annually. The cost of goods sold is expected to vary with sales. Operating expenses are expected to grow at 75 percent of the sales growth rate (i.e., be semi-fixed) for the next three years before again growing at the same rate as sales beginning in 2023. Individual asset accounts are expected to grow at the same rate as sales. Depreciation can be forecasted either as a percentage of sales or as a percentage of net fixed assets (because net fixed assets are expected to grow at the same rate as sales growth). Accounts payable and accrued liabilities are also expected to grow with sales.

Biometrix’s management is interested in determining the equity value of the venture as of the end of 2019. Because Biometrix is in its startup life cycle stage, management and venture investors believe that 40 percent is an appropriate discount rate until the firm reaches its long-run or perpetuity growth rate. At that time it will have survived and will become a more typical firm with an estimated cost of equity capital of 20 percent. One million shares of common stock are outstanding. 

A. Project the financial statements for the next four years (2020–2023).

B. Calculate the valuation cash flow for each year.

C. Determine Biometrix’s equity value at the end of 2019. 

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BIOMETRIX CORPORATION INCOME STATEMENT FOR DECEMBER 31, 2019 (THOUSANDS OF DOLLARS) Sales Cost of goods sold Gross profit Operating expenses Depreciation Earnings before interest and taxes Interest Earnings before taxes Taxes (40%) Net income $20,000 -10,000 10,000 -7,500 -400 2,100 -100 2,000 -800 $ 1,200