In: Finance
You are an analyst for a venture capital fund. The firm you are valuing is expected to have free cash flows next year of $1,000, and they are expected to grow at 4% every year forever (if they survive). Further, using CAPM and accounting for the fees that your VC charges, the cost of capital for the firm is 23%. What is the value of the firm, assuming it survives?
$813
$5263
$961.54
$25000
A rival VC fund put in a bid for the firm. They are offering to invest $100 for 16.67% of the firm. What is the implied pre-money valuation? What is the implied probability of survival for the firm?
100 ; about 25%
300 ; about 15%
500 ; about 10%
700 ; about 75%
Value of Firm = Free cash flow to the next year /(Cost of Capital - Growth rate)
= 1000/(23%-4%)
= 1000/19%
= $5263.16 ie $5263
Post Money Valuation by rival VC Fund = Investment / Expected return
= 100/16.67%
= $600
Pre Money Valuation = Post Money valuation - Investment
= $600 - $100
= $500
For calculating probability of survival lets take probability of survival = p
Probability of non survival = 1-p
In the case Firm survives its value is 5263, and in case it does not survives its value can be taken as zero.
Value taken by rival firm = (Survival Value x p) + Non survival Value x (1-p)
$500 = ($5263 x p) + 0 x (1-p)
p = $500/5263
p = 0.09500285 i.e. 9.51% that is approx 10%
So, answer is 500 ; about 10%