Question

Chrystal Wong Products is a survival-stage venture.Here is the best guess for what the venture would have left over after all operating expenses and reinvestment: $50,000 this year, $100,000 next year, $200,000 the third year, $2,000,000 the fourth year, and 2,500,000 the fifth year. In the sixth year, Chrystal believes that the mature venture would have a cash flow of approximately $2,700,000 and this would be expected to grow at 5 percent per year after year 6.

1. What is the DCF value of Chrystal Wong’s equity?

Jim wants to invest $500,000 in Chrystal Wong Products in year 3.

2. How much ownership would he acquire in exchange for the $500,000 investment? Briefly explain.

3. What is the projected going concern of Chrystal Wong five years from now?

4. If the P/E multiple for Chrystal Wong is 10, what is the net income at the end of year 5?

If Chrystal Wong is going to maintain the equity multiplier of 1 at all times,

5. What is the enterprise value?

6. What is the crude income available to both debtholders and equity holders?

7. What is an estimate of the EV/EBITDA multiple ?

If Chrystal Wong’s investors believe that the venture has a 20 percent chance of being a black hole, a 60 percent chance of becoming the living dead, and a 20 percent chance of achieving venture utopia.

8. Which discount process allows venture investors to invest without knowing the category (black hole, living dead or utopia)?

Answer 1