Venture capitalists are interested in valuing the cash flows of Innovative Medical Solutions. Management and investors believe
Question:
Venture capitalists are interested in valuing the cash flows of Innovative Medical Solutions. Management and investors believe that the firm is in the survival life cycle, and hence they will discount the relevant cash flows at the appropriate discount rate. The firm's accountant has produced an estimated profit and loss for the corporation. The profit and loss statement for Year 1 represents each of the five years while the form is in its survival stage. The initial outlay for laboratory construction will be $600 million plus $45 million of working capital. The venture capitalist will provide the initial outlay and only seek the risk-adjusted return but not part of firm ownership.
Innovative Medical Solutions | ||
Income Statement for Year 1 | ||
(in millions) | ||
Revenue | 1,280 | |
Operating expenses | ||
Cost of goods sold | 512 | |
Administration costs | 128 | |
Depreciation | 120 | |
Total operating expenses | 760 | |
Net profit | 520 | |
Tax | 208 | |
Net profit after tax | 312 |
QUESTION 2b [8 Marks]
What arecritical variables that impacted your valuation for Question 2a? Selectonly one of the critical variables and show the impact on the valuation.