Session 20_ Post-class test

E high forecasted earnings high multiple of earnings

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Unformatted text preview: . d. The earnings at young companies are generally much higher than initially projected. e. The failure rate among young companies is very high. Solution 1. In the traditional venture capital approach to valuation, you forecast earnings in a future year, apply a multiple to these earnings and discount it back to today at a target rate of return to get a value for the business. If you are the VC negotiating for a stake in the business, in return for the capital you are providing to it, which of the following combinations will you 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 VC, you want your estimate of value to be as low as possible (so that you can claim a higher percentage of that value). To accomplish that objective, you want to use low earnings and a low multiple (to get a low exit value) and a high target rate of return (to make the current value even lower). 2. In the traditional venture capital approach to valuation, you forecast earnings in a future year, apply a multiple to these earnings and discount it back to today at a target rate of...
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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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