1. You are trying to price a Topknot Technologies, a start-up and have the following projections...
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1. You are trying to price a Topknot Technologies, a start-up and have the following projections (in millions) for the next five years: Revenues EBITDA Tax Rate FCFF Cost of Capital 1 2 $15.00 $60.00 ($30.00) ($50.00) 0% ($55.00) ($110.00) 0% 11% 11% 3 5 $110.00 $260.00 $500.00 ($60.00) ($30.00) $100.00 0% 0% 30% ($160.00) ($90.00) ($20.00) 11% 4 Year Probability of Capital Freeze 11% You have run a regression of EV/EBITDA against tax rate and EBITDA margin (EBITDA/Sales) for more established firms in the business and have the following: EV/EBITDA = 8.00 + 100.00 (EBITDA Margin) -10.00 (Tax Rate) [All numbers in the regression are entered in decimals, i.e., 20% is 0.20] a. If the cost of capital is 11% and you have $50 million of net debt outstanding today, estimate what you would pay for equity today, based upon your expected pricing in year 5 and incorporating the effect of cash flows for the next five years. 11% b. The negative cash flows that are forecast for the next five years are called "cash burn" and will require fresh capital to be raised. Assuming that the company plans to issue only equity to meet these needs, estimate how much of a discount you are already applying to your equity value (in part a) to reflect this dilution? 1 20% c. Now assume that there is a chance that capital markets will freeze up, making it impossible to raise capital and that the probabilities of that happening, by year, are below: 2 15% 3 10% 4 5% Estimate the value of equity with this probability considered, assuming that if capital is unavailable, the business will have to shut down and equity will be worth nothing. 5 5% 1. You are trying to price a Topknot Technologies, a start-up and have the following projections (in millions) for the next five years: Revenues EBITDA Tax Rate FCFF Cost of Capital 1 2 $15.00 $60.00 ($30.00) ($50.00) 0% ($55.00) ($110.00) 0% 11% 11% 3 5 $110.00 $260.00 $500.00 ($60.00) ($30.00) $100.00 0% 0% 30% ($160.00) ($90.00) ($20.00) 11% 4 Year Probability of Capital Freeze 11% You have run a regression of EV/EBITDA against tax rate and EBITDA margin (EBITDA/Sales) for more established firms in the business and have the following: EV/EBITDA = 8.00 + 100.00 (EBITDA Margin) -10.00 (Tax Rate) [All numbers in the regression are entered in decimals, i.e., 20% is 0.20] a. If the cost of capital is 11% and you have $50 million of net debt outstanding today, estimate what you would pay for equity today, based upon your expected pricing in year 5 and incorporating the effect of cash flows for the next five years. 11% b. The negative cash flows that are forecast for the next five years are called "cash burn" and will require fresh capital to be raised. Assuming that the company plans to issue only equity to meet these needs, estimate how much of a discount you are already applying to your equity value (in part a) to reflect this dilution? 1 20% c. Now assume that there is a chance that capital markets will freeze up, making it impossible to raise capital and that the probabilities of that happening, by year, are below: 2 15% 3 10% 4 5% Estimate the value of equity with this probability considered, assuming that if capital is unavailable, the business will have to shut down and equity will be worth nothing. 5 5%
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Answer rating: 100% (QA)
SOLUTION a To estimate the value of equity today we need to calculate the present value of the expected cash flows for the next five years and the terminal value at year 5 and then subtract the net de... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Posted Date:
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