# Financing New Ventures

Satisfactory Essays
Chapter 9: Exercise 1
Assume you sell for \$100,000 a 10 percent ownership stake in a future payment one year from now of \$1.5 million.

A. What are you saying about the implied return for the 10 percent owner?
Rate * value =.1 * \$1, 500,000= \$150,000...SImply put the 10% owner will be investing \$100,000 with an expected return of \$150,000 one year from now. Implied return = (\$150,000 - \$100,000)/\$100,000 = \$50,000/\$100,000 = 50% Implied current (present) value of venture = \$ Investment / Percentage Ownership = \$100,000/.10 = \$1,000,000 Expected return = (\$1,500,000 - \$1,000,000)/\$1,000,000 = 50%
B. What is the present value of the entire \$1.5 million, using the implied return from Part A?
PV = \$1,500,000/(1.50) = \$1,000,000
C. What is 10 percent of the value determined in Part B?
Answer: \$1,000,000 x .10 = \$100,000
D. Does it matter whether you grow the \$100,000 at 50 percent to \$150,000 and note it is 10 percent of \$1.5 million, or discount the \$1.5 million at 50 percent to get \$1 million and note that \$100,000 is 10 percent of this present value? Answer: It really doesn't matter. We see from the calculations above that we get the same answer either way...First, \$100,000 x 1.50 = \$150,000 future value...this =10% of the \$1,500,000 total FV and then \$1,500,000/(1.50) = \$1,000,000 present value =10% of the total PV.

Chapter 9: Exercise 2 The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:
1 ……………… − \$ 50,000
2 ……………… − \$ 20,000
3 ……………….. \$100,000
4 ……………….. \$400,000
5 ……………….. \$800,000
A . Assume annual cash flows are expected to remain at the \$800,000 level after Year 5 (i.e., Year 6 and thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the venture’s present value.
DCF PV = -\$50,000/1.4 + -\$20,000/1.42 + \$100,000/1.43 + \$400,000/1.44 +

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