A venture capitalist wants to estimate the value of a new venture. The venture i

Question

A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of Year 5 when the net income is estimated at $1,600,000. A publicly traded competitor or “comparable firm” has current earnings of $1,000,000 and a market capitalization value of $10,000,000. A.Estimate the value of the new venture at the end of Year 5. Show your answer using both the direct comparison method and the direct capitalization method. What assumption are you making when using the current price-to-earning relationship for the comparable firm?

B.Estimate the present value of the venture at the end of Year 0 if the venture capitalist wants a 40 percent annual rate of return on the investment.

Explanation / Answer

a)P?E of comparible firm= 10,000,000/1,000,000= 10

New venture value= 10*1,600,000=$16,000,00.

The assumptions are the comparble firm and new venture are in same industry and the both the companies are in same business life cycle(i.e early stage or matured or settled)

b)Present value of venture=1,600,000/1.4^5=$2,974,950.9

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