Your management team identifies a biotech firm, BioBalance that has found a new diabetes treatment. The firm's founders are out of money and want to sell their technology. Because you and your team don't have enough money to acquire the firm outright on your own, you turn to outside sources of funding. A venture bank is willing to put up an $8 million, four-year loan at 14% per year, which only has interest payments due during its life; the principal balance will be paid off at the liquidity event. Your team puts up $1 million of its own capital. One of your friends from the MBA program is a venture capitalist, and his firm agrees to invest $4 million at an expected 40% annual return for four years, at which time they expect a liquidity event in order to obtain their money and return back. Assume that in four years, Bio Balance will have an EBITDA of $3.75 million. Include all your calculations to support each answer in order to earn full credit. Answers must be completed in sequence.

Required:

(a) Assume that in four years, Bio Balance will be valued with an EBITDA enterprise exit multiple of 8.0. What will be the anticipated enterprise value of the firm at that point?

(b) Given the future value calculated in (a), what will be the equity value at that time?

(c) Because the VC firm expects a 40% compound return on its investment, what would be the dollar value of its portion of the equity value you calculated in (b)?

(d) Based on your answer in (c), what would be the amount of the equity up front that you would have to give up in order to obtain their original venture capital investment in Bio Balance?

(e) What will be the dollar value of the management team's original $1 million equity investment at the time of the liquidity event?

Answer rating: 100% (QA)

a the anticipated Enterprise Value in four years 8 times annual EBITDA 8x375 million 30 milli... View the full answer