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Chapter 13 Solutions

# Chapter 13 Solutions - Problem 13-1a Valuation Template...

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Problem 13-1a Income Statement Information Year 0 1 2 3 4 Sales \$10,000,000 Cash Flow Information External Funds Required to Support Operations \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Equity Capital Raised \$6,834,143 Beginning Cash Balance \$6,834,143 \$6,125,850 \$4,857,143 \$3,000,000 (\$0) Uses of Cash \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Cash Invested in Marketable Securities \$5,834,143 \$4,625,850 \$2,857,143 (\$0) (\$0) Return on Invested Cash \$291,707 \$231,293 \$142,857 (\$0) (\$0) Ending Cash Balance \$6,125,850 \$4,857,143 \$3,000,000 (\$0) (\$0) Investor Valuation and Ownership Allocation Investor Hurdle Rate 75.00% 60.00% 45.00% 30.00% 30.00% Continuing Value Earnings Multiplier 6 Continuing Value of Venture \$60,000,000 Required Future Value of Investment \$64,096,786 Ownership Share Required 106.83% Valuation Template Single-Stage Investment - Venture Capital Method

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Problem 13-1b Income Statement Information Year 0 1 2 3 4 Sales \$10,000,000 Cash Flow Information External Funds Required to Support Operations \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Equity Capital Raised \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 Beginning Cash Balance \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Uses of Cash \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Cash Invested in Marketable Securities \$0 \$0 \$0 \$0 \$0 Return on Invested Cash \$0 \$0 \$0 \$0 \$0 Ending Cash Balance \$0 \$0 \$0 \$0 \$0 Investor Valuation and Ownership Allocation Investor Hurdle Rate 75.00% 60.00% 45.00% 30.00% 30.00% Continuing Value Earnings Multiplier 6 Continuing Value of Venture \$60,000,000 Investor's Required Future Value and Equity Share Required Beginning Share Required Ending Share Value Fourth Stage 6.50% 6.50% \$3,900,000 Third Stage 7.50% 7.01% \$4,205,000 Second Stage 11.84% 10.24% \$6,144,000 First Stage 20.50% 15.63% \$9,378,906 Ownership Required 39.38% \$23,627,906 Valuation Template Multi-Stage Investment - Venture Capital Method
Problem 13-1c Spreadsheet is modified to evaluate the effects of changing expectations about value. Income Statement Information Year 0 1 2 3 4 Sales \$10,000,000 Cash Flow Information External Funds Required to Support Operations \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Equity Capital Raised \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 Beginning Cash Balance \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Uses of Cash \$1,000,000 \$1,500,000 \$2,000,000 \$3,000,000 \$0 Cash Invested in Marketable Securities \$0 \$0 \$0 \$0 \$0 Return on Invested Cash \$0 \$0 \$0 \$0 \$0 Ending Cash Balance \$0 \$0 \$0 \$0 \$0 Investor Valuation and Ownership Allocation Investor Hurdle Rate 75.00% 60.00% 45.00% 30.00% 30.00% Continuing Value Earnings Multiplier 6 6 6 6 Continuing Value Est. at time of investment \$60,000,000 \$54,000,000 \$45,000,000 \$36,000,000 Investor's Required Future Value and Equity Share Required Beginning Share Required Ending Share Value Ending value of claim Fourth Stage 10.83% \$3,900,000 \$3,900,000 Third Stage 9.34% \$4,205,000 \$3,364,000 Second Stage 11.38% \$6,144,000 \$4,096,000 First Stage 15.63% \$9,378,906 \$5,627,344 Ownership Required 65.63% \$23,627,906 Valuation Template Multi-Stage Investment - Venture Capital Method

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Problem 13-2a Market Information Risk-free Rate of Interest 21.55% Market Rate or Return 51.81% Market Risk Premium 30.26% Market Standard Deviation 40.00% Correlation Between Venture and Market 0.25 Venture Cash Flows Time 0 1 2 3 4 5 Success Scenario (\$7,234) \$60,000 Failure Scenario (\$7,234) \$12,000 Expected Cash Flow (\$7,234) \$36,000 Standard Deviation \$0 \$24,000 Beta of Venture 0.58 Investor Interest and Value Share of Investment 94.47% Share of Equity 26.41% Cash Flows Success Scenario (\$6,834) \$15,846 Failure Scenario (\$6,834) \$3,169 Expected Cash Flow (\$6,834) \$9,508 Standard Deviation \$0 \$6,338 Value of Interest \$6,836 NPV of Interest in Venture \$2 Entrepreneur Interest and Value Share of Investment 5.53% Share of Equity 73.59% Entrepreneur's Wealth \$1,500 Fraction of Wealth Invested in Venture 27% Cash Flows of Investment in Venture Success Scenario (\$400) \$44,154 Failure Scenario (\$400) \$8,831
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