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The following questions and computational assignments are provided to help guide you
in the preparation of the paper. But, don’t just simply answer the questions. Work them
into the commentary of your paper as part of your overall analysis.
These are only a sample of the suggested questions to address. There are many more
aspects of the case that need to be analyzed in your paper.
Why might Venture Capitalists be interested in investing in Neverfail?
What did management do right?
What did management do wrong?
Make recommendations as to what management should do now.
Do you think that it is feasible that Neverfail will reach that required terminal value
computed in your exhibit? Explain why.
EXHIBIT TO THE PAPER
Assume the following for valuations computations:
VCs will buy 1 million shares at \$1.50 per share.
There are 6 million shares outstanding at the time of the negotiations with the VCs
There will be an IPO in five years and the price/earnings ratio will be 15
The VCs have a required rate of return of 40%. (In their negotiations the VCs said they
needed 50%, but that is somewhat high. Neverfail is shipping product and is well beyond
start-up stage)
Compute the following and attach as an exhibit to your paper.
What is the Pre-Money valuation of the company?
What is the Post-Money valuation of the company?
What percentage ownership did the VCs obtain for their investment?
What will the terminal value of the company have to be in 5 years in order for the VCs to
realize their required rate of return?
Do you think that it is feasible that Neverfail will reach that required terminal value?
Explain why. In answering this you may assume the following:
1. The projection is reasonable for the fourth quarter EBT (earnings before taxes) for
FYE 3/31/95 per exhibit 5.
2. The annualized run rate for EBT may thus be assumed to be \$426,000 multiplied by 4.
3. The expected tax rate is 30%.

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