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Chapter 10 Questions and Problems - ENTREPRENEURIAL FINANCE...

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E NTREPRENEURIAL F INANCE : Strategy, Valuation, and Deal Structure Chapter 10. Valuation in Practice QUESTIONS AND PROBLEMS 1. CBR Inc. had cash flow of $1.45 million in 2010. The company expects stable growth of 3 percent in the future and the cost of capital is 9 percent. a. Estimate value of CBR Inc. at the end of 2010. b. If you were valuing a firm comparable to CBR at the end of 2010, what cash flow multiplier would you use? 2. The following table contains seven years of financial projections for a new venture that is seeking capital to finance the commencement of operations. All dollar figures are in thousands. All cash flow during this period is expected to be reinvested in the venture and is reflected in the table. Assuming the projections represent expected values, and given only this information, how would you suggest valuing the venture? How would you estimate continuing value and reflect it in your valuation? Explain your reasoning. Year 1 2 3 4 5 6 7 Revenue $0 $850 $2,300 $6,100 $10,700 $13,100 $13,800 EBIT ($2,000) ($788) ($1,925) ($975) ($325) $275 $450 Assets $3,000 $1,000 $4,500 $3,525 $6,200 $6,475 $8,925 3. You are considering investing in a venture, Mason Multimedia. Five years from now, and assuming the venture is successful, Mason is projected to have revenue of $52 million, EBIT of $2 million, and assets of $35 million. The three-year compound annual growth of sales as of year 5 is expected to be 20 percent. The venture does not anticipate paying dividends during this period. As a basis for estimating Mason’s continuing value, you have compiled information on five public companies that are in the same or closely related industries. The comparable firm information is summarized in the following table. Dollar figures are in millions. Analyze the information and use it to estimate the continuing value of Mason Multimedia. Explain your reasoning. Comparable Firms Age in Years Assets: Book Value Sales EBIT Dividends 3-Year Sales CAGR Assets Market Value Firm A 4 $40 $25 ($2) $0 85% $85 Firm B 6 $120 $65 $2 $0 25% $155 Firm C 9 $60 $130 $10 $0 3% $110 Firm D 15 $45 $70 $4 $1 15% $80 Firm E 17 $195 $280 $30 $16 6% $210
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4. Edu-tainment, Inc. is a provider of courses that are delivered over the Internet. The company has developed the concept and worked out a means of controlling access and charging for its services. It expects to contract for content with professors who are recognized for “fun” teaching. These instructors intersperse their lecture material with jokes and anecdotes and use other tactics that help keep students interested. Hence, the company name. The entrepreneur believes that by making Internet education entertaining he can attract and retain a large share of the adult education market.
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