Case Study A: Valuing Early Stage Ventures - 10 marks

Raymond Spencer founded FlavourStop at the beginning of 2019, which serves a variety of dairy free frozen yogurt. Below are the financial statements for FlavourStop from 2019 2023.

Because FlavourStop is in its start-up life cycle stage, Raymond and the venture investors believe that 40% is an appropriate discount rate until the firm reaches its long-term growth rate of 7% in 2023. At that time, it will have survived and will become a more typical firm with an estimated WACC of 16.52%, target debt-to-value of 0.3, cost of debt of 12% and tax rate of 30%.

Questions:

1. Determine the equity valuation cash flow for each year from 2020 2023. (4 marks)

2. Determine the terminal value of the venture in year 2022. (3 marks)

3. Determine FlavourStops equity value at the end of 2019. What is its value per share? (2 marks)

4. What percentage of ownership should FlavourStop give up to an outside investor who wants to invest $10,000 in the venture at the end of 2019? (1 mark)

FlavourStop has 10,000 shares outstanding. Income Statements 2019 2020 2021 2022 2023 Sales 200,000 280,000 260,000 240,000 214,000 Cost of goods sold (110,000) (154,000) (143,000) (132,000) (117,700) Gross profit 90,000 126,000 117,000 108,000 96,300 Operating expenses (70,000) (98,000) (91,000) (84,000) (74,900) EBITDA 20,000 28,000 26,000 24,000 21,400 Depreciation (4,000) (4,800) (5,760) (6,912) (7,396) EBIT 16,000 23,200 20,240 17,088 14,004 Interest (1,500) (3,300) (3,825) (4,260) (3,900) EBT 14,500 19,900 16,415 12,828 10,104 Taxes (30%) (4,350) (5,970) (4,925) (3,848) (3,031) Net income 18,850 25,870 21,340 16,676 13,135 Balance Sheets 2019 2020 2021 2022 2023 Required Cash 11,850 16,590 15,405 14,220 12,680 Surplus cash 18,630 27,180 26,885 31,765 Accounts receivable 20,000 24,000 28,800 34,560 36,979 Inventories 25,000 30,000 36,000 43,200 46,224 Total current assets 56,850 89,220 107,385 118,865 127,648 Gross fixed assets 54,000 68,800 86,560 107,872 121,316 Accumulated depreciation (4,000) (8,800) (14,560) (21,472) (28,868) Net fixed assets 50,000 60,000 72,000 86,400 92,448 Total assets 106,850 149,220 179,385 205,265 220,096 Accounts payable 15,000 18,000 21,600 25,920 27,734 Accrued liabilities 10,000 11,500 13,225 15,209 17,490 Bank loan 10,000 22,000 25,500 28,400 26,000 Total current liabilities 35,000 51,500 60,325 69,529 71,224 Common stock 53,000 53,000 53,000 53,000 53,000 Retained earnings 18,850 44,720 66,060 82,736 95,871 Total equity 71,850 97,720 119,060 135,736 148,871 Total liabilities & equity 106,850 149,220 179,385 205,265 220,096 FlavourStop has 10,000 shares outstanding. Income Statements 2019 2020 2021 2022 2023 Sales 200,000 280,000 260,000 240,000 214,000 Cost of goods sold (110,000) (154,000) (143,000) (132,000) (117,700) Gross profit 90,000 126,000 117,000 108,000 96,300 Operating expenses (70,000) (98,000) (91,000) (84,000) (74,900) EBITDA 20,000 28,000 26,000 24,000 21,400 Depreciation (4,000) (4,800) (5,760) (6,912) (7,396) EBIT 16,000 23,200 20,240 17,088 14,004 Interest (1,500) (3,300) (3,825) (4,260) (3,900) EBT 14,500 19,900 16,415 12,828 10,104 Taxes (30%) (4,350) (5,970) (4,925) (3,848) (3,031) Net income 18,850 25,870 21,340 16,676 13,135 Balance Sheets 2019 2020 2021 2022 2023 Required Cash 11,850 16,590 15,405 14,220 12,680 Surplus cash 18,630 27,180 26,885 31,765 Accounts receivable 20,000 24,000 28,800 34,560 36,979 Inventories 25,000 30,000 36,000 43,200 46,224 Total current assets 56,850 89,220 107,385 118,865 127,648 Gross fixed assets 54,000 68,800 86,560 107,872 121,316 Accumulated depreciation (4,000) (8,800) (14,560) (21,472) (28,868) Net fixed assets 50,000 60,000 72,000 86,400 92,448 Total assets 106,850 149,220 179,385 205,265 220,096 Accounts payable 15,000 18,000 21,600 25,920 27,734 Accrued liabilities 10,000 11,500 13,225 15,209 17,490 Bank loan 10,000 22,000 25,500 28,400 26,000 Total current liabilities 35,000 51,500 60,325 69,529 71,224 Common stock 53,000 53,000 53,000 53,000 53,000 Retained earnings 18,850 44,720 66,060 82,736 95,871 Total equity 71,850 97,720 119,060 135,736 148,871 Total liabilities & equity 106,850 149,220 179,385 205,265 220,096