Private investors like Angels often have high appetitive for investing in scalable -ups of less than five
Question:
Private investors like Angels often have high appetitive for investing in scalable -ups of less than five years with promising future (accelerated growth within 5 years). However, the amounts ranges from P50 000 for individuals and collectively invest between P250 000 up to P1 million in return for about 20 to 30 percent of the firm’s equity. For their investment, they typically seek approximately 20 to 30 times the original amount of the investment over a period of five (5) years because at seed stage the risk is considerably high. Generally, these investors are mostly educated and are entrepreneurs themselves.
Required:
a) Suppose the Terminal Value (TV) of your business at the end of the valuation period (5th Year) is estimated to be P30 million and the investors expect 30x return on investment (ROI) on the P1 million investment in the harvest year. Using the formulas shared with you (Post Money Valuation = Terminal Value in the nth Year/Anticipated ROI in the nth year and Pre Money Valuation = Post Money Valuation minus Investment Amount). Calculate:
i. Post-Money Valuation
ii. Pre-Money Valuation of enterprise.
b) Supposing your business required an investment of P5 million over the next three years. The initial cash flows and earnings for the first two years are negative but
the future for the business is promising. Considering the high risk of an early stage venture, the investor wants a 50 percent return (targeted return) on the initial investment. The forecasted after tax earnings (profits) in the third year is P10 million. The investor’s sets P/E ratio or multiple of earnings at 8x on the basis of comparable in the public market and experience within similar ventures. the formulas shared with you (discounted terminal valuation = TV/(1+Target Return)#years and Required Percent = Investment Amount/Discounted Terminal Value (TV)), Calculate:
i. Discounted Terminal Value (TV) in the 3rd year based on the targeted rate of return the investor is seeking.
ii. The required ownership Percent.
3. Develop Financial Assumptions For Year 1: (10 marks)
· Identify all your firm’s revenue drivers (e.g. list of revenue streams)
· sales volumes
· unit selling price
· unit cost price
· profit per unit
· Variable costs (per unit and in total)
· Fixed costs (overheads – separate the manufacturing overheads from the operating overheads)
4. Prepare a Cost/Benefit Analysis - show the individual drivers percentage contribution towards the revenue and costs. (10 marks)
5. Calculate the following for Year 3 of your enterprise: (15 marks)
· Contribution Margin
· Break even sales in value and/or volumes
· Draw Break-even chart
A Survey of Mathematics with Applications
ISBN: 978-0134112107
10th edition
Authors: Allen R. Angel, Christine D. Abbott, Dennis Runde