Marty Jones is negotiating with a Venture Capital Fund for $10 MIL financing for
ID: 2486572 • Letter: M
Question
Marty Jones is negotiating with a Venture Capital Fund for $10 MIL financing for his new venture. Marty is the sole founder and owns 100% of the company's equity. He is adamant that he must keep a 60% interest in the company after external capital is raised. A VC investor believes an 10X return in NLT 5 years is 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 2. Discreet Cash Flow projections prepared from pro forma financial statements are presented below. After the discreet forecasting period (Yr 4), Rick and the VC expect CFs to grow by 3.5% per year in perpetuity. What imputed rate of return demanded by the investor? (3) Given that required rate of return, what value would the VCs probably give to projected Discreet Period pro forma CFs? (3) What is the firm's Terminal Value (TV)? (2) What is the Present Value of the firm? (2) At that valuation; how much of the company will Marty have to give up to raise $10 million and will he do the deal?Explanation / Answer
year Cash flow dis factor 7.38% present value of cashflow 0 (10,000,000) 1 (10,000,000) 1 (2,800,000) 0.931 (2,606,800) 2 1,000,000 0.867 867,000 3 3,750,000 0.808 3,030,000 4 11,000,000 0.752 8,272,000 net cashflow 2,950,000 (437,800) average cashflow 737,500 imputed rate of return 7.38% terminal value 84,285,714 2950000/3.5% present value of firm (437,800) Value given up 50,571,429 84285714.29*.6
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