ENTREPRENEURIAL FINANCE ASSIGNMENT Case Solution & Answer

 ENTREPRENEURIAL FINANCE ASSIGNMENT Case Solution

Cash flows and IRR’s
Founder	$			-50,000	0	0	0	0	6,208,663
IRR	%	162%
VC	$			-1,000,000	0	0	0	0	3,310,502
IRR	%	27%

 

This shows that the IRR of the founder has increased significantly from 103% to 162% due to this extra incentive from the VC.

Question 2

a.

The IRR and the times money return of the investment for this portfolio would be as follows:

EXPECTED RETURN
a.	Year	0	1	2	3	4	5
	Initial Investment	-10000000
	Exit Values						14000000
	Cash Flows	-10000000	0	0	0	0	14000000
	IRR	7%	Â
	Times Money	1.4	times

 

b.

The IRR and the MIRR for this scenario would be as follows:

IRR & MIRR
b.	Year	0	1	2	3	4	5
	Initial Investment	-10000000
	Cash Flows			7000000	7070000	7140700	7212107
	Reinvestment returns				70000	70700	71407
	Remaining Exit Value						7000000
	Net Cash Flows	-10000000	0	7000000	70000	70700	7071407
	IRR	11%
	MIRR	8%

 

c.

The expected returns after incorporating taxes would be as follows:

EXPECTED RETURNS
c.	Year	0	1	2	3	4	5
	Initial Investment	-10000000	0	0	0	0	0
	Exit Values	0	0	0	0	0	14000000
	Cash Flows	-10000000	0	0	0	0	14000000
	Less: Tax						4200000
	Net Cash Flow	-10000000	0	0	0	0	9800000
	IRR	0%	0	0	0	0	0
	Times Money	0.98	times

 

Question 3

Participating preferred shares are commonly used in venture capitalist financing and this gives the VCs the right to convert to common stock at the time of the exit if they are willing to. This gives the investors the right to have claim and participation in the excess earnings with the common equity holders and in addition to this they are also paid preferred dividends. Common stock holders are not entitled to preferred dividends.

 

Question 4

Yes, I agree with this that the VC method and the DCF methods are both different methods for the valuation of investments. The reason for this is clear that the DCF method takes into account all the cash flows over the investment horizon, whereas, in the VC method the exit price is first of all estimated for the investment and from that value the post money valuation is calculated taking the risk and the time of the investors into account. This is the reason both the methods result in different valuations.

Question 5

            I disagree with this as the NPV does not result in post money values because the NPV calculations do not only capture all the positive cash flows during the life of the company however, it might also include the selling price of the company at the time of the sale. Apart from this, all the negative cash flows are also incorporated in the NPV calculations.

Question 6

            In such situations when the capital structure changes frequently from year to year and due to these cyclicality issues a single WACC cannot be decided. Therefore, in such situations the best valuation methods for valuing the company is the adjusted present value method (APV). In this method, the equity is valued separately as a base case on the basis of the un levered cost of equity and the tax savings on account of the debt are valued separately and their present value is calculated on the basis of the blend cost of debt and then both are added to compute the total value of the company. This makes in more simple to incorporate the complexities associated with changing capital structures. Therefore, the adjusted present value method which is also called as the capital cash flow method should be used when the capital structure is changing frequently…………………..

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