Assignment #2 (8 points) ________

Jim Jacobs is negotiating with a Venture Capital Fund for $ 4 MIL financing for his new venture. Jim is the sole founder and owns 100% of the companys equity. He is adamant that he must keep a 60% interest in the company after external capital is raised. A VC investor is willing to accept a 40% interest and believes an 8X return in NLT 5 years will generate 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. Discreet Cash Flow projections prepared from pro forma financial statements are presented below. After the discreet forecasting period (Yr 4), Jim and the VC expect CFs to grow by 2.5% per year in perpetuity.

Year Cash Flow

1 $ -2,800,000

2 $ -1,450,000

3 $ 3,150,000

4 $ 10,000,000

1. What imputed rate of return demanded by the investor? (1)

Imputed Rate of Return = (((Final Value/Initial Value)^(1/Number of years))-1)*100

IROR = (((8)^(1/5))-1)*100

IROR = 51.57%

2. Given that required rate of return, what value would the VCs give to the forecasted Discreet Cash Flows above? (1)

PV of Yearly Cash Flows = Cash Flow/(1+51.57%)^Year#

Year 1 = -2,800,000/(1+0.5157)^1

Year 1 = -1,847,331.27

Year 2 = -1,450,000/(1+0.5157)^2

Year 2 = -631,162.96

Year 3 = 3,150,000/(1+0.5157)^3

Year 3 = 904,629.62

Year 4 = 10,000,000/(1+0.5157)^4

Year 4 = 1,894,728.54

3. What is the firms projected Terminal Value (TV)? (2)

Terminal Value = Year 5 Cash Flow/(Required Return Perpetual Growth Rate)

Year 5 Cash Flow = Year 4 Cash Flow*(1 + Perpetual Growth Rate)

Year 5 Cash Flow = 10,000,000*(1+2.5%) = 10,250,000

Terminal Value = 10,250,000/(0.5157 0.025)

Terminal Value = 20,888,526.6

4. What is the Total Present Value of the firm? (1) (be consistent)

Total Present Value = Terminal Value + Total Present Value of Discrete Year Cash Flows

Total Present Value of Discrete Year Cash Flows = -1,847,331.27 631,162.96 + 904,629.62 + 1,894,728.54 = 320,863.93

Total Present Value = 20,888,526.6+320,863.93 = 21,209,390.5

5. At that valuation; how much equity will Jacobs have to give up to raise $4 million on a post money basis? (1)

6. Given these requirements and projections, what must the company be worth in Year (4) not Present Value? (2)