Reiman School of Finance Advanced Business Valuation

Reiman School of Finance Advanced Business Valuation
“Act now. Act with speed.”
“The great danger of dealing with venture capitalists is the ‘slow maybe’.”
— John Doerr, Renowned Venture Ccapitalist at Kleiner Perkins Caufield & Byers
FIN 3700 / FIN 4150
Class Work # 4
Due on 8/8
Question 1. True or Disagree and Explain
Cost of Undiversified Equity is the same as the Unlevered Cost of Capital.
Question 2. Valuation Discount and Premium
The LTE Inc, a financial advisory firm, is putting together the deal book and running the valuation analysis
for various private clients. Assume that you are the “rock-star analyst” in the firm and asked to lead the
valuation team to finalize the offer. A 15% control premium and a 30% illiquidity discount are justified for all
the situations. Also, assume that there are 100 million shares in all the target companies.
Discuss what adjustments should be applied in each scenario and calculate the maximum offer.
Deal A: A private equity (PE) firm, financial buyer, acquires a privately held company with dispersed
shareholders. The intrinsic value of common equity based on the Relative Valuation-public comparables model
is estimated to be $90 million. What would be the maximum offer to existing shareholders?
Deal C: A strategic buyer acquires a privately held company with a majority shareholder, who owns 55% of
the shares of this company. The intrinsic value of common equity based on the APV model is estimated to be
$90 million and the present value of synergies is estimated to be $10 million. What would be the maximum
offer to the controlling shareholder? To the minority shareholders?
Question 3. Venture Capital Model
Read the “Outreach Networks: First Venture Round” case and answer the following questions:
(1) What was the disagreement between the founder and venture capitalist?
What might explain the differences in the valuation of ORN?
(Think about the key assumptions / inputs used in the venture capital model)
(2) Use the following assumptions and apply the “First Round Single Stage” venture capital model to
estimate % of new shares, # of new shares to VC, price per share, pre- & post-money valuation.
Show your modeling work in Excel. Which party’s valuation is justified? Founder or VC?
– VC required a target rate of return of 50% and expected to exit at year 2017;
– APKT & ARUN were selected as the appropriate comparables;
– An illiquidity / lack-of-marketability discount of 25% was applied to the average forward P/E of
selected comparables to account for the non-marketability of this startup’s equity shares.
P/E multiple at Exit = average forward P/E x (1-DLOM)
(3) (Challenge-Yourself Question, not required; For fun and you will earn bonus points for good work)
Could you come up with the appropriate assumptions and inputs to justify VC’s valuation.
Hint: consider using the EV/EBITDA multiple
A good understanding of venture valuation and what might cause the differences is critical
in venture capital investing and could help at the negotiation table.