Description of this paper

Stock market evaluation




valuation.xls Download Attachment;SAIC needs $500,000 in venture capital to bring a new Internet messaging service to market. The firm's management has approached Venus Company, a venture capital firm located in the;high-tech start-up mecca known as Venus Company in Main, which has expressed an interest in the investment opportunity. SAIC's management made the following EBITDA forecasts for the;firm spanning the next five years;Year EBITDA;1 -$175,000;2 75,000;3 300,000;4 650,000;5 1,050,000;Venus Company believes that the firm will sell for six times EBITDA in the fifth year of its operations, and that the firm will have $1.2 million in debt at that time, including $1 million in interestbearing debt. Finally, SAIC's management anticipates having a $200,000 cash balance in five years.;The venture capitalist is considering three ways of structuring the financing;1. Straight common stock, where the investor requires an IRR of 45%.;2. Convertible debt paying 10% interest. Given the change from common stock to debt, the investor would lower the required IRR to 35%.;3. Redeemable preferred stock with an 8% dividend rate plus warrants entitling the VC to purchase 40% of the value of the firm's equity for $100,000 in five years. In addition to the share of;the firm's equity, the holder of the redeemable preferred shares will receive 8% dividends for each of the next five years, plus the face value of the preferred stack in Year 5.;TERMINOLOGY;A convertible security (debt or preferred stock) is replaced with common stock when it is converted. The principal is not repaid. In contrast, the face value of a security with warrants is repaid;and the investor has the right to receive common stock shares by remitting the warrants.;Redeemable preferred stock is typically straight preferred with no conversion privileges. The preferred always carries a negotiated term to maturity specifying when it must be redeemed by the;company (often the sooner of a public offering or five to eight years). The preferred shareholders typically receive a small dividend (sometimes none), plus the face amount of the preferred;issue at redemption, plus a share of the value of the firm in the form of common stock or warrants.;a. Based on the offering terms for the first alternative (common stock), what fraction of the firm's shares will it have to give up to get the requisite financing?;b. If the convertible debt alternative is chosen, what fraction of the firm's ownership must be given up?;c. What rate of return will the firm have to pay for the new funds if the redeemable preferred stock alternative is chosen?;d. Which alternative would you prefer if you were the management of SAIC? Why?;Given;Capital needed;Projected EBITDA in year 5;Exit year;EBITDA sales multiple in year 5;Interest bearing debt in year 5;Total debt in year 5;Cash in year 5;Solution Legend;$500,000;$1,050,000;5;6.00 times;$1,000,000;$1,200,000;$200,000;= Value given in problem;= Formula/Calculation/Analysis required;= Qualitative analysis or Short answer required;= Goal Seek or Solver cell;= Crystal Ball Input;= Crystal Ball Output;Analysis of financing structure #1--Straight Common;Stock;VC's required rate of return;Required $ return to VC Firm;Enterprise value of firm in year 5;Equity value in year 5;Part a. Alt #1. Required ownership"share;45%;Analysis of financing structure #2--Convertible Debt;VC's required rate of return;Coupon rate on debt;Required $ year 5 return to VC Firm;Enterprise value of firm in year 5;Equity value in year 5;Part b. Alt #2. Required ownership"share;35%;10%;Year;Cash to Conv Debt;0;$(500,000);1;2;3;Terminal cash flow;IRR (Conv Debt);Analysis of financing structure #3--Redeemable Preferred;Plus Equity;VC's required ownership share;Dividend rate on preferred stock;Required $ year 5 return to VC Firm;Exercise price of warrants;Part c. Alt #3. Required rate of return;40%;8%;Alternate solution procedure for Alternative #3;Given;Estimated Equity Value in Year 5;VCs Share of Equity in Year 5;40%;Note: With redeemable preferred stock the;value of the firm's equity is reduced by the;repayment of the face value of the preferred;stock when it is redeemed.;Solution;Year;Cash Investment;Dividends;Redemption Value;Share of Equity Value - warrant price;Total Cash Flows;IRR--Preferred Investor Return;d.;4;0;$(500,000);1;2;3;4;5;500,000;5;View Full Attachment;Additional Requirements;Level of Detail: Show all work


Paper#18220 | Written in 18-Jul-2015

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