Financing New Ventures
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?
Answer:
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?
Answer:
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.
Answer:
DCF PV = -$50,000/1.4 + -$20,000/1.42 + $100,000/1.43 + $400,000/1.44 +
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?
Answer:
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?
Answer:
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.
Answer:
DCF PV = -$50,000/1.4 + -$20,000/1.42 + $100,000/1.43 + $400,000/1.44 +