Session 20_ Post-class test

What proportion of the company should he get in

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Unformatted text preview: return to get a value for the business. If you are the owner of the business negotiating with the VC about the portion of the business that you will give up in return for the capital you are providing to it, which of the following combinations will you be most likely to use in your valuation? a. Low forecasted earnings, low multiple of earnings, high target rate of return. b. Low forecasted earnings, high multiple of earnings, high target rate of return. c. Low forecasted earnings, low multiple of earnings, low target rate of return. d. High forecasted earnings, low multiple of earnings, high target rate of return. e. High forecasted earnings, high multiple of earnings, high target rate of return. f. High forecasted earnings, high multiple of earnings, low target rate of return. Explanation: If you are the founder, you want your estimate of value to be as high as possible (so that you can give away a smaller percentage of that value). To accomplish that objective, you want to use high earnings and a high multiple (to get a high exit value) and a low target rate of return (to make the current value higher). 3. Assume that a young business has been valued at $40 million, discounting expected cash flows (after reinvestment needs) back at a risk- adjusted rate. The venture capitalist will be investing $10 million in the...
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This note was uploaded on 10/10/2013 for the course ECON 304 taught by Professor Aswathdamodaran during the Spring '12 term at NYU.

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