Assignment 1

Assignment 1 - information in Exhibit 1. Assume Digital...

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FINA 537 Equity Valuation Professor Laura Xiaolei Liu Digital Everywhere Inc. Due Friday Nov 6 before class (e-copy and hard copy) Your venture capital firm, Artificial VC Ltd , has been approached by an entrepreneur seeking funds for his new business, Digital Everywhere, Inc. Your boss wants your help valuing the business and she wants a recommendation for whether your firm should invest in Digital Everywhere. Assume current time is the end of 1998 and the appropriate discount rate for Digital Everywhere is 16%. You should also assume that Digital Everywhere will remain all equity financed and ignore the possibility of any future debt issues. The depreciation over the estimated periods are: 0 (year 1998), 91, 239, 253, 358, 424 respectively, which are incorporated in the SG&A items. Assume the growth rate of cash flows post 2003 is 5%. Answer the following questions. 1. Construct a DCF model to value Digital Everywhere based on the
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Unformatted text preview: information in Exhibit 1. Assume Digital Everywhere is expected to “hit the numbers” in Exhibit 1. 2. Suppose, as stated in the case, that Digital Everywhere had only a 30% chance of hitting the numbers in Exhibit 1. Provide a new valuation of Digital Everywhere that accounts for this fact. 3. The manager of the company Jerome estimates that “he would only need about $1 million in cash to run the business”. However, you believe that with the assistance of the management experts in Artificial VC , the company could be run more efficiently. Only $0.8 million cash are needed to run the business. Anything above and beyond $0.8 million would be considered excess cash. What is the firm value under the new assumption? You suggest the company to pay a special dividend of $0.2 million now. What is the firm value after the special dividend?...
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This note was uploaded on 04/12/2010 for the course FINA 537 taught by Professor Luxiaolei during the Spring '09 term at HKUST.

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