Valuation Techniques - Assignment Example

Valuation Techniques Insert Insert The percentage of the company that needs to be given up for 5 m investment Required ROR by investor(s): 25% Net income in five years: $ 3.2 m Expected P/E ratio in four years: 12 times Problem MV5 = (P/E4)* (E5) Whereby (E5) is 3.2 and (P/E4) is 12. Therefore, its computation will be as follows; = 12*3.2 $ =38.4M MV0= 38.4/ (1.25) ^5= 12.58 The % of the venture to be given up= Venture capital needed/ MV0 1.5/12.58=18.9% Year % of growth Revenue After Tax Margin After Tax profit Discount Factor PV Earnings in M 1 15 3.4m 0 0 1.30 0 2 20 4.08m 4 3.92m 0.37 1.45 3 25 5.1m 5 4.85m 1.21 5.869 4 30 6.63m 10 5.97m 1.669 9.964 5 35 8.95m 15 7.61 2.239 17.039 6 40 12.53m 16 10.53 5.376 56.609 7+ 12 10 9 Discount formulae D= 1/ (1+p) ^n Whereby P is the periodic interest, which is 5% N is the number of years to repay the debt, which is 6 years in our case.

Therefore, to determine a present value of the future payments, we will have to multiply the amount owed by the discount factor. The portion of the company that should be given up if there is a need for $1.6 m in venture capital The portion of the venture to be given up= Venture capital needed/ MV0 Therefore, we will take the period in paying back the debt, which is 6 years multiply by $ 1.6m in venture capital. Its computation will be as follows; 6*1.6= $ 9.6M The company will, therefore, give up $ 9.

6m of its portion if there is a need for $1.6 m in venture capital. References Francis, R. (2008). Market valuation of accrual components. Review of Accounting and Finance, 7(2), 150-166. http://dx.doi.org/10.1108/14757700810874128 Sohn, B. (2011). Analyst forecast, accounting conservatism and the related valuation implications. Accounting & Finance, 52, 311-341. http://dx.doi.org/10.1111/j.1467-629x.2011.00428.x Vlittis, A., & Charitou, M. (2011). Valuation effects of investor relations investments.

Accounting & Finance, 52(3), 941-970.