This chapter discusses valuation methodologies, deal structures, and negotiations between entrepreneurs and investors. It examines how venture capitalists estimate company value using methods like discounted cash flow valuation and compares expected versus actual pricing in financing rounds. The chapter also explores how equity is allocated in deals and key deal terms. Challenges in negotiations are analyzed, like differing goals between entrepreneurs and investors regarding risk, time horizons, and control. Staged financing structures and their incentive effects are reviewed.
This document outlines the key topics covered in Chapter 15, which examines the valuation, structuring, and negotiation of deals between entrepreneurs and investors. The chapter will cover methodologies used to value companies, how equity is allocated to investors, how deals are structured including important terms and conditions, and how to negotiate and close deals. It will also analyze good versus bad deals and potential pitfalls entrepreneurs may face in venture financing deals. The document provides an outline of lecture materials that cover valuation methods, staged financing, structuring deals, and negotiating terms. It also lists exercises and case studies that can be used to teach these concepts.
The document discusses harvesting entrepreneurial ventures. It examines the importance of first building a great company to create harvest options. Several harvest options are identified, including employee stock ownership plans, management buyouts, mergers and acquisitions, outright sales, and public offerings. Going public provides access to capital but has disadvantages like ongoing disclosure costs. Successful entrepreneurs often reinvest in their community and in new ventures after harvesting.
A study on construction of optimal portfolio using sharpe’s single index modelProjects Kart
1. The document discusses constructing an optimal portfolio using Sharpe's single index model. It analyzes stock price movements and index values of companies over 5 years to calculate expected returns, standard deviation, and beta values.
2. The methodology uses secondary data sources and interprets the results using Sharpe's model to select stocks for the optimal portfolio.
3. The scope is limited to 30 Sensex companies over 5 years based only on share prices, indexes, interest rates, and beta values.
Valuation methods used in mergers & acquisitionsRS P
The document discusses various valuation methods used in mergers and acquisitions, including:
1) Asset-based valuation which values a company based on the book value of its assets and liabilities.
2) Earnings-based valuation which values a company based on capitalizing its earnings or using its price-earnings ratio.
3) Discounted cash flow valuation which values a company based on the present value of its future free cash flows.
The document recommends using multiple valuation methods and averaging the results to determine a company's fair value for an acquisition.
ABSTRACT
PROJECT TITLE: - “AN ANALYTICAL STUDY ON WEIGHTED AVERAGE COST OF CAPITAL (WACC)”
COMPANY: - YAAR CONSTRUCTION COMPANY
The study is taken on the weighted average cost of capital of Yaar Construction Company. The company took the 40% loan out of total capital and the remaining 60% was its own contribution. In this study the various estimation other than the 40% loan for finding the WACC is undertaken. I took 20% of loan, then 60% and eventually, 80% loan.
The main objectives are
• To estimate the Weighted Average Cost of Capital of the Yaar Construction Company.
• To understand how capital structure affects owner’s value
• To study the changes in the weighted average cost of capital on the company’s financial status.
The thesis is conducted on the basis of both primary and secondary data. The primary data is the financial statement presentations of the Yaar Construction Company. Secondary data is taken by the researcher from secondary source internal and external the researcher must thoroughly search secondary data sources before commissioning any effort for collecting primary data.
The Profits in the year 2010 was 6,245,703/-, the most profitable year. The least was the year 2013 where only Rs. 1,807,115/- was the net profit. The company’s own 60% contribution and 40% loan was remarkable and the weighted average rate of return was 0.15024 (i.e. 15%). The internal rate of return was 0.645 (i.e. 64.5%) which is very much high and best for the company. NPV @15% was 9,739,653/-. In 20% loan the WACC was 16.5%, whereas, in 60% loan it was 13.5% and in 80% loan it was 12%.
The total equity is Rs. 9,800,000/-. We took 20%, 60% and 80% loan estimation.
No. of Share having face value 10 each:
784,000 = 9,800,000*(100%-20%)/10
392,000 = 9,800,000*(100%-60%)/10
WACC for 20%, 60% and 80% we found was 16.5%, 13.5% and 12%. We selected the minimum among them (i.e. 12%, which is for the 80% loan estimation).
IRR for the 20%, 60% and 80% we found by applying the formula was 65.5%, 63.5% and 62.50%. In that we selected the maximum percentage due to having the rule of internal rate of return. (I.e. the highest IRR is to be considered).
Now, the Value per share is derived by dividing the Net Present Value upon number of shares. The justification is that by taking 80% loan estimation the value per share for the owner increases more than taking the other estimations. In 20% it was 12.88 similarly, for 60% it was 25.29 and for 80% it was 48.85, which is the highest among them.
Therefore, the 80% loan proposal is better for the company to accept.
Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...Dayana Mastura FCCA CA
This document discusses weighted average cost of capital (WACC) which is a calculation of a firm's cost of capital considering the costs of the different components of the firm's capital structure (debt, equity, preference shares). It defines WACC and explains its importance as the minimum return a firm needs to earn on new projects/investments to break even. The document also outlines how to calculate WACC and the costs of each capital component (cost of equity using CAPM, cost of debt, cost of preference shares). It discusses how WACC is used as a benchmark for projects, in determining leverage limits, for valuation, and in discounting cash flows in a DCF analysis.
REQUIREMNETS FOR GETTING LICENSE OF VALUER
ROLE OF VALUER WITH VARIOUS AGENCIES FOR LOANS,
MORTGAGE,
PROPERTY DISPUTES IN COURT OF LAW ETC.
MORE WORKS OF VALUER AND VARIOUS
FORMS TO BE FILLED BY VALUER IN HIS
WORK.
FORMATS OF VALUATION REPORT FILLED BY VALUER.
TERMS OF ENGAGEMENT FOR EMPANELMENT OF VALUERS.
IBA SUB-COMMITTEE ON
MORTGAGE AND VALUATION OF PROPERTY
This document discusses various methods for valuing a company, including:
1. The price-earnings (P/E) ratio method, which values a company based on multiplying its earnings per share by an appropriate P/E ratio.
2. The net assets method, which values a company based on the value of its tangible and intangible assets minus its liabilities.
3. Other methods like dividend-based approaches, discounted cash flow analysis, and cash flow-based valuations.
It provides guidelines for determining an appropriate P/E ratio and discusses factors to consider when using the net assets or P/E ratio methods to value an acquisition target.
This document outlines the key topics covered in Chapter 15, which examines the valuation, structuring, and negotiation of deals between entrepreneurs and investors. The chapter will cover methodologies used to value companies, how equity is allocated to investors, how deals are structured including important terms and conditions, and how to negotiate and close deals. It will also analyze good versus bad deals and potential pitfalls entrepreneurs may face in venture financing deals. The document provides an outline of lecture materials that cover valuation methods, staged financing, structuring deals, and negotiating terms. It also lists exercises and case studies that can be used to teach these concepts.
The document discusses harvesting entrepreneurial ventures. It examines the importance of first building a great company to create harvest options. Several harvest options are identified, including employee stock ownership plans, management buyouts, mergers and acquisitions, outright sales, and public offerings. Going public provides access to capital but has disadvantages like ongoing disclosure costs. Successful entrepreneurs often reinvest in their community and in new ventures after harvesting.
A study on construction of optimal portfolio using sharpe’s single index modelProjects Kart
1. The document discusses constructing an optimal portfolio using Sharpe's single index model. It analyzes stock price movements and index values of companies over 5 years to calculate expected returns, standard deviation, and beta values.
2. The methodology uses secondary data sources and interprets the results using Sharpe's model to select stocks for the optimal portfolio.
3. The scope is limited to 30 Sensex companies over 5 years based only on share prices, indexes, interest rates, and beta values.
Valuation methods used in mergers & acquisitionsRS P
The document discusses various valuation methods used in mergers and acquisitions, including:
1) Asset-based valuation which values a company based on the book value of its assets and liabilities.
2) Earnings-based valuation which values a company based on capitalizing its earnings or using its price-earnings ratio.
3) Discounted cash flow valuation which values a company based on the present value of its future free cash flows.
The document recommends using multiple valuation methods and averaging the results to determine a company's fair value for an acquisition.
ABSTRACT
PROJECT TITLE: - “AN ANALYTICAL STUDY ON WEIGHTED AVERAGE COST OF CAPITAL (WACC)”
COMPANY: - YAAR CONSTRUCTION COMPANY
The study is taken on the weighted average cost of capital of Yaar Construction Company. The company took the 40% loan out of total capital and the remaining 60% was its own contribution. In this study the various estimation other than the 40% loan for finding the WACC is undertaken. I took 20% of loan, then 60% and eventually, 80% loan.
The main objectives are
• To estimate the Weighted Average Cost of Capital of the Yaar Construction Company.
• To understand how capital structure affects owner’s value
• To study the changes in the weighted average cost of capital on the company’s financial status.
The thesis is conducted on the basis of both primary and secondary data. The primary data is the financial statement presentations of the Yaar Construction Company. Secondary data is taken by the researcher from secondary source internal and external the researcher must thoroughly search secondary data sources before commissioning any effort for collecting primary data.
The Profits in the year 2010 was 6,245,703/-, the most profitable year. The least was the year 2013 where only Rs. 1,807,115/- was the net profit. The company’s own 60% contribution and 40% loan was remarkable and the weighted average rate of return was 0.15024 (i.e. 15%). The internal rate of return was 0.645 (i.e. 64.5%) which is very much high and best for the company. NPV @15% was 9,739,653/-. In 20% loan the WACC was 16.5%, whereas, in 60% loan it was 13.5% and in 80% loan it was 12%.
The total equity is Rs. 9,800,000/-. We took 20%, 60% and 80% loan estimation.
No. of Share having face value 10 each:
784,000 = 9,800,000*(100%-20%)/10
392,000 = 9,800,000*(100%-60%)/10
WACC for 20%, 60% and 80% we found was 16.5%, 13.5% and 12%. We selected the minimum among them (i.e. 12%, which is for the 80% loan estimation).
IRR for the 20%, 60% and 80% we found by applying the formula was 65.5%, 63.5% and 62.50%. In that we selected the maximum percentage due to having the rule of internal rate of return. (I.e. the highest IRR is to be considered).
Now, the Value per share is derived by dividing the Net Present Value upon number of shares. The justification is that by taking 80% loan estimation the value per share for the owner increases more than taking the other estimations. In 20% it was 12.88 similarly, for 60% it was 25.29 and for 80% it was 48.85, which is the highest among them.
Therefore, the 80% loan proposal is better for the company to accept.
Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...Dayana Mastura FCCA CA
This document discusses weighted average cost of capital (WACC) which is a calculation of a firm's cost of capital considering the costs of the different components of the firm's capital structure (debt, equity, preference shares). It defines WACC and explains its importance as the minimum return a firm needs to earn on new projects/investments to break even. The document also outlines how to calculate WACC and the costs of each capital component (cost of equity using CAPM, cost of debt, cost of preference shares). It discusses how WACC is used as a benchmark for projects, in determining leverage limits, for valuation, and in discounting cash flows in a DCF analysis.
REQUIREMNETS FOR GETTING LICENSE OF VALUER
ROLE OF VALUER WITH VARIOUS AGENCIES FOR LOANS,
MORTGAGE,
PROPERTY DISPUTES IN COURT OF LAW ETC.
MORE WORKS OF VALUER AND VARIOUS
FORMS TO BE FILLED BY VALUER IN HIS
WORK.
FORMATS OF VALUATION REPORT FILLED BY VALUER.
TERMS OF ENGAGEMENT FOR EMPANELMENT OF VALUERS.
IBA SUB-COMMITTEE ON
MORTGAGE AND VALUATION OF PROPERTY
This document discusses various methods for valuing a company, including:
1. The price-earnings (P/E) ratio method, which values a company based on multiplying its earnings per share by an appropriate P/E ratio.
2. The net assets method, which values a company based on the value of its tangible and intangible assets minus its liabilities.
3. Other methods like dividend-based approaches, discounted cash flow analysis, and cash flow-based valuations.
It provides guidelines for determining an appropriate P/E ratio and discusses factors to consider when using the net assets or P/E ratio methods to value an acquisition target.
This document provides examples of leverages calculations for various companies and scenarios. It includes data on sales, costs, capital structure, production levels, and other financial metrics. Leverages calculated include operating leverage, financial leverage, and combined leverage. Questions cover calculating these leverages, as well as related metrics like earnings per share and percentage changes, for different levels of output, fixed costs, and capital structures.
This document discusses capital structure and the factors considered when determining a firm's optimal capital structure. It discusses several approaches to determining the optimal capital structure, including:
1. The net income approach, which argues that changing capital structure affects overall cost of capital and firm value.
2. The net operating income/Modigliani-Miller approach, which argues that changing capital structure does not affect overall cost of capital or firm value.
3. The traditional/intermediate approach, which argues that increasing debt initially decreases overall cost of capital up to an optimal point, after which further increasing debt increases overall cost of capital.
The document analyzes the assumptions and implications of each approach. It also lists factors
This document discusses various methods for valuing company shares, including book value, quoted value, fair market value, intrinsic value, and yield value. It describes the net assets method and yield method in more detail.
The net assets method values shares based on a company's net assets per share. This considers tangible and intangible assets. The yield method values shares based on earnings yield or dividend yield by capitalizing profits.
Factors like a company's net worth, earnings, dividends, management, and economic conditions can impact share values. Methods like net assets, earnings yield, and dividend yield are outlined to calculate share values. The document also discusses ex-dividend and cum-dividend share values
The document discusses capitalization and capital structure. It addresses two issues: the magnitude of capital employed and the proportion of different forms of capital. It describes two approaches to determining optimal capitalization - cost theory and earnings theory. Earnings theory is generally preferable as it is aligned with a firm's earning capacity and estimates can be made reliably for ongoing concerns based on historical profits. Over-capitalization can harm a firm's performance, while under-capitalization has some advantages. Various measures are discussed to reorganize a firm's capital structure, such as changing share par value or issuing bonus shares.
Fundamental Analysis by Vivek SrivastavaAxis Direct
Fundamental Analysis is a study of factors (company specific and external environment) that affect the value of stock. This program will help you to understand the impact of factors on the valuation of the stock, analysis of the environment and interpretation of financial statement.
For more information visit : https://simplehai.axisdirect.in/learn/eclasses
This document discusses optimal capital structure and includes the following key points:
1. An optimal capital structure maximizes a company's market value while minimizing the cost of capital by striking a balance between risk and return. It occurs when the market price per share is at its maximum and cost of capital is at its minimum.
2. Several illustrations are provided to demonstrate how changes in the debt-equity mix impact total market value and overall cost of capital. Adding more debt initially increases value but can eventually increase costs if debt levels rise too high.
3. The document also defines capital structure, lists some features of an optimal structure, and outlines several theories of capital structure, including the Net Income Approach and Modigl
TO STUDY THE OPTIMIZATION OF PORTFOLIO RISK AND RETURNPriyansh Kesarwani
Vijay Shankar Singh presented on optimizing portfolio risk and return. The presentation covered introducing portfolio theory, constructing three portfolios of public, private and foreign companies, evaluating their risk-adjusted returns over three years using Sharpe's and Treynor's measures. Portfolio III of foreign collaboration securities performed best with the highest three-year return of 52.57% and outperforming on risk-adjusted measures. The presentation recommended investing in portfolio III for long-run gains due to its diversification and correlation with the market index.
The document discusses real option valuation as an alternative to traditional discounted cash flow approaches. Real option valuation treats a company's ability to adapt its strategy over time as a type of financial option. This flexibility allows the company to capitalize on opportunities or cut losses, affecting its overall enterprise value. The document outlines different types of real options like growth, abandonment, and timing options. While more accurate than discounted cash flows, real option models also have disadvantages due to difficulties in obtaining inputs for the underlying valuation models.
3.4 interpreting published accounts (part 2) - moodleMissHowardHA
This document provides instruction on calculating and interpreting various financial ratios to assess business performance, including liquidity, profitability, efficiency, and gearing ratios. It explains how to calculate ratios such as the current ratio, acid test ratio, gross profit margin, asset turnover, inventory turnover, payables days, receivables days, and gearing ratio. The document also discusses the values and limitations of ratio analysis for measuring business performance. Learners are given practice calculating ratios for sample companies and inferring what can be learned from the analysis.
This chapter discusses return on invested capital (ROIC) and growth as fundamental drivers of company value. It provides the following key points:
1. ROIC measures a company's ability to generate returns from its capital investments and should be compared to its cost of capital and returns on alternative investments.
2. The value creation formula shows that higher long-term ROIC and growth rates lead to greater company value.
3. Sustainable competitive advantages allow some companies to maintain high ROIC for extended periods, while others see ROIC decline over time as advantages erode.
4. Empirical analysis shows ROIC and growth tend to decrease as companies mature, with 50% of high-ROIC companies
Valuation methods used in mergers and acquisitionsanvi sharma
This document discusses various valuation methods used in mergers and acquisitions, including asset-based valuation, earnings-based valuation using capitalization of earnings and PE ratios, dividend-based valuation using growth models, CAPM-based valuation, and free cash flow valuation. It emphasizes that the fair value of a company is typically determined by averaging the results of two or more methods to account for different factors and avoid reliance on a single approach.
The report estimates the fair market value of Sample business at $20,000. It analyzed the business's financial data, risk factors, and used a proprietary valuation process to determine the value. The scope was limited to client-submitted data and risk ratings. The report disclaims responsibility and advises consulting advisors, as the value is an estimate that could differ from an actual transaction price.
This document analyzes the performance of Type A and Type B mutual funds in Turkey from 2009-2014 using risk-adjusted measures. It evaluates 10 Type A and 10 Type B funds, applying the Sharpe Ratio, Treynor Ratio, Jensen's Alpha and Sortino Ratio. The results show that Type A funds generally outperformed Type B funds over this period, though performance was mixed. Neither fund type consistently generated high risk-adjusted returns. Overall, the study aims to provide guidance to investors on evaluating mutual fund performance.
This document discusses principles of asset and liability valuation according to GAAP. It defines valuation as estimating worth and notes it can be done for financial assets and liabilities. Several models for valuation are described, including absolute value models like discounted cash flow that determine future cash flows, and relative value models that compare to similar assets. Key principles of GAAP that guide valuation are also summarized, such as the historical cost and revenue recognition principles.
This document describes the capitalization method of valuing average profits to determine a firm's capitalization value and goodwill. The capitalization value is calculated by taking the average profits and dividing by the normal rate of return, then multiplying by 100. Goodwill is the difference between the total capitalized value and the net assets. An example is provided where a firm earns average profits of Rs. 65,000 at a 10% normal rate of return, with total assets of Rs. 680,000 and liabilities of Rs. 180,000, resulting in a capitalization value of Rs. 650,000 and goodwill of Rs. 150,000.
This document provides an overview of financial markets and various asset classes including equity, fixed income securities, and money market instruments. The key points covered include:
1) It describes the different components of financial markets including stock exchanges, bond markets, money markets, derivatives markets, and commodity markets.
2) It explains equity or stock markets in more detail including common stock, preferred stock, equity terminology like P/E ratio, dividend yield, and market capitalization.
3) It covers fixed income securities or bonds in depth including features, risks, yields, and the Indian debt market structure.
Corporate Valuations “Techniques & Application”: A compilation of research oriented valuation articles.
Contents: Business valuation, Relative valuation, Sum of the parts valuation and value creation, ESOP valuation, Discounted Cash Flow Valuation, Enterprise Valuation etc.
The document discusses various methods for valuing shares, including net asset value, dividend yield, earnings capitalization, and average methods. It outlines factors to consider under each method such as expected dividends, earnings rates, assets and liabilities. The purpose of share valuation is discussed for scenarios like mergers, reconstructions, and determining values for gifts or inheritance.
This document provides a summary of Birla Pacific Medspa Limited's initial public offering process and results. The company raised Rs. 65.18 crores through a book built IPO of 65,175,000 shares priced between Rs. 10-11 per share. The issue was oversubscribed 1.18 times with qualified institutional buyers and retail investors subscribing 1.04 and 1.82 times respectively. The shares were allotted at Rs. 10 per share and are expected to begin trading on the Bombay Stock Exchange on July 7, 2011. The IPO proceeds will be used to expand the company's network of healthcare centers across India and for working capital requirements.
This document outlines various methodologies used by venture capitalists and investors to value companies. It discusses how equity proportions are allocated to investors based on required rates of return. Several valuation methods are examined, including the venture capital method, fundamental method, First Chicago method, discounted cash flow method, and rule-of-thumb valuations. The document also notes that actual deal valuations are influenced by current market conditions and bargaining power between investors and entrepreneurs.
The document discusses internal and external causes for business failure, as well as signs that a company may be in trouble. It outlines factors like recession, changes in management, lack of planning, and cash flow issues. The document also provides steps for turning around a troubled company, including cash flow analysis, determining available cash, cutting costs in areas like payroll and capacity, and considering longer-term solutions.
This document provides examples of leverages calculations for various companies and scenarios. It includes data on sales, costs, capital structure, production levels, and other financial metrics. Leverages calculated include operating leverage, financial leverage, and combined leverage. Questions cover calculating these leverages, as well as related metrics like earnings per share and percentage changes, for different levels of output, fixed costs, and capital structures.
This document discusses capital structure and the factors considered when determining a firm's optimal capital structure. It discusses several approaches to determining the optimal capital structure, including:
1. The net income approach, which argues that changing capital structure affects overall cost of capital and firm value.
2. The net operating income/Modigliani-Miller approach, which argues that changing capital structure does not affect overall cost of capital or firm value.
3. The traditional/intermediate approach, which argues that increasing debt initially decreases overall cost of capital up to an optimal point, after which further increasing debt increases overall cost of capital.
The document analyzes the assumptions and implications of each approach. It also lists factors
This document discusses various methods for valuing company shares, including book value, quoted value, fair market value, intrinsic value, and yield value. It describes the net assets method and yield method in more detail.
The net assets method values shares based on a company's net assets per share. This considers tangible and intangible assets. The yield method values shares based on earnings yield or dividend yield by capitalizing profits.
Factors like a company's net worth, earnings, dividends, management, and economic conditions can impact share values. Methods like net assets, earnings yield, and dividend yield are outlined to calculate share values. The document also discusses ex-dividend and cum-dividend share values
The document discusses capitalization and capital structure. It addresses two issues: the magnitude of capital employed and the proportion of different forms of capital. It describes two approaches to determining optimal capitalization - cost theory and earnings theory. Earnings theory is generally preferable as it is aligned with a firm's earning capacity and estimates can be made reliably for ongoing concerns based on historical profits. Over-capitalization can harm a firm's performance, while under-capitalization has some advantages. Various measures are discussed to reorganize a firm's capital structure, such as changing share par value or issuing bonus shares.
Fundamental Analysis by Vivek SrivastavaAxis Direct
Fundamental Analysis is a study of factors (company specific and external environment) that affect the value of stock. This program will help you to understand the impact of factors on the valuation of the stock, analysis of the environment and interpretation of financial statement.
For more information visit : https://simplehai.axisdirect.in/learn/eclasses
This document discusses optimal capital structure and includes the following key points:
1. An optimal capital structure maximizes a company's market value while minimizing the cost of capital by striking a balance between risk and return. It occurs when the market price per share is at its maximum and cost of capital is at its minimum.
2. Several illustrations are provided to demonstrate how changes in the debt-equity mix impact total market value and overall cost of capital. Adding more debt initially increases value but can eventually increase costs if debt levels rise too high.
3. The document also defines capital structure, lists some features of an optimal structure, and outlines several theories of capital structure, including the Net Income Approach and Modigl
TO STUDY THE OPTIMIZATION OF PORTFOLIO RISK AND RETURNPriyansh Kesarwani
Vijay Shankar Singh presented on optimizing portfolio risk and return. The presentation covered introducing portfolio theory, constructing three portfolios of public, private and foreign companies, evaluating their risk-adjusted returns over three years using Sharpe's and Treynor's measures. Portfolio III of foreign collaboration securities performed best with the highest three-year return of 52.57% and outperforming on risk-adjusted measures. The presentation recommended investing in portfolio III for long-run gains due to its diversification and correlation with the market index.
The document discusses real option valuation as an alternative to traditional discounted cash flow approaches. Real option valuation treats a company's ability to adapt its strategy over time as a type of financial option. This flexibility allows the company to capitalize on opportunities or cut losses, affecting its overall enterprise value. The document outlines different types of real options like growth, abandonment, and timing options. While more accurate than discounted cash flows, real option models also have disadvantages due to difficulties in obtaining inputs for the underlying valuation models.
3.4 interpreting published accounts (part 2) - moodleMissHowardHA
This document provides instruction on calculating and interpreting various financial ratios to assess business performance, including liquidity, profitability, efficiency, and gearing ratios. It explains how to calculate ratios such as the current ratio, acid test ratio, gross profit margin, asset turnover, inventory turnover, payables days, receivables days, and gearing ratio. The document also discusses the values and limitations of ratio analysis for measuring business performance. Learners are given practice calculating ratios for sample companies and inferring what can be learned from the analysis.
This chapter discusses return on invested capital (ROIC) and growth as fundamental drivers of company value. It provides the following key points:
1. ROIC measures a company's ability to generate returns from its capital investments and should be compared to its cost of capital and returns on alternative investments.
2. The value creation formula shows that higher long-term ROIC and growth rates lead to greater company value.
3. Sustainable competitive advantages allow some companies to maintain high ROIC for extended periods, while others see ROIC decline over time as advantages erode.
4. Empirical analysis shows ROIC and growth tend to decrease as companies mature, with 50% of high-ROIC companies
Valuation methods used in mergers and acquisitionsanvi sharma
This document discusses various valuation methods used in mergers and acquisitions, including asset-based valuation, earnings-based valuation using capitalization of earnings and PE ratios, dividend-based valuation using growth models, CAPM-based valuation, and free cash flow valuation. It emphasizes that the fair value of a company is typically determined by averaging the results of two or more methods to account for different factors and avoid reliance on a single approach.
The report estimates the fair market value of Sample business at $20,000. It analyzed the business's financial data, risk factors, and used a proprietary valuation process to determine the value. The scope was limited to client-submitted data and risk ratings. The report disclaims responsibility and advises consulting advisors, as the value is an estimate that could differ from an actual transaction price.
This document analyzes the performance of Type A and Type B mutual funds in Turkey from 2009-2014 using risk-adjusted measures. It evaluates 10 Type A and 10 Type B funds, applying the Sharpe Ratio, Treynor Ratio, Jensen's Alpha and Sortino Ratio. The results show that Type A funds generally outperformed Type B funds over this period, though performance was mixed. Neither fund type consistently generated high risk-adjusted returns. Overall, the study aims to provide guidance to investors on evaluating mutual fund performance.
This document discusses principles of asset and liability valuation according to GAAP. It defines valuation as estimating worth and notes it can be done for financial assets and liabilities. Several models for valuation are described, including absolute value models like discounted cash flow that determine future cash flows, and relative value models that compare to similar assets. Key principles of GAAP that guide valuation are also summarized, such as the historical cost and revenue recognition principles.
This document describes the capitalization method of valuing average profits to determine a firm's capitalization value and goodwill. The capitalization value is calculated by taking the average profits and dividing by the normal rate of return, then multiplying by 100. Goodwill is the difference between the total capitalized value and the net assets. An example is provided where a firm earns average profits of Rs. 65,000 at a 10% normal rate of return, with total assets of Rs. 680,000 and liabilities of Rs. 180,000, resulting in a capitalization value of Rs. 650,000 and goodwill of Rs. 150,000.
This document provides an overview of financial markets and various asset classes including equity, fixed income securities, and money market instruments. The key points covered include:
1) It describes the different components of financial markets including stock exchanges, bond markets, money markets, derivatives markets, and commodity markets.
2) It explains equity or stock markets in more detail including common stock, preferred stock, equity terminology like P/E ratio, dividend yield, and market capitalization.
3) It covers fixed income securities or bonds in depth including features, risks, yields, and the Indian debt market structure.
Corporate Valuations “Techniques & Application”: A compilation of research oriented valuation articles.
Contents: Business valuation, Relative valuation, Sum of the parts valuation and value creation, ESOP valuation, Discounted Cash Flow Valuation, Enterprise Valuation etc.
The document discusses various methods for valuing shares, including net asset value, dividend yield, earnings capitalization, and average methods. It outlines factors to consider under each method such as expected dividends, earnings rates, assets and liabilities. The purpose of share valuation is discussed for scenarios like mergers, reconstructions, and determining values for gifts or inheritance.
This document provides a summary of Birla Pacific Medspa Limited's initial public offering process and results. The company raised Rs. 65.18 crores through a book built IPO of 65,175,000 shares priced between Rs. 10-11 per share. The issue was oversubscribed 1.18 times with qualified institutional buyers and retail investors subscribing 1.04 and 1.82 times respectively. The shares were allotted at Rs. 10 per share and are expected to begin trading on the Bombay Stock Exchange on July 7, 2011. The IPO proceeds will be used to expand the company's network of healthcare centers across India and for working capital requirements.
This document outlines various methodologies used by venture capitalists and investors to value companies. It discusses how equity proportions are allocated to investors based on required rates of return. Several valuation methods are examined, including the venture capital method, fundamental method, First Chicago method, discounted cash flow method, and rule-of-thumb valuations. The document also notes that actual deal valuations are influenced by current market conditions and bargaining power between investors and entrepreneurs.
The document discusses internal and external causes for business failure, as well as signs that a company may be in trouble. It outlines factors like recession, changes in management, lack of planning, and cash flow issues. The document also provides steps for turning around a troubled company, including cash flow analysis, determining available cash, cutting costs in areas like payroll and capacity, and considering longer-term solutions.
New Capital _ The deal valuation,structure n negotationBTEC UTeM
This chapter discusses methodologies for valuing startup companies, including how equity is allocated to investors. It examines how deals are structured with terms and conditions, and how deals are negotiated and closed. The chapter analyzes an actual case study and provides outlines for teaching the material through lectures, case studies, exercises or a combination. It details methods venture capitalists use to estimate company value, such as determining required rates of return and ownership shares. The chapter compares theoretical pricing models to real-world deal structures and conditions, and outlines additional valuation techniques.
The document summarizes key points from a talk given by Kenneth Morse at MIT on trends in entrepreneurship and venture capital investing. Some of the main topics discussed include the need for startups to focus on customers and revenue growth over flashy presentations, the shakeout of unsuccessful venture capital firms, and characteristics of successful entrepreneurs like leadership, bias toward action, and attracting top talent.
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...Mercer Capital
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends Newsletter provides a brief digest and commentary of some of the most relevant market trends influencing the fair value regarding private equity portfolio investments.
The economic valuation of the negative externalities associated with tourism could help manage emerging social conflicts in major European travel destinations. Citizens' associations in places like Venice, Barcelona, and Mallorca have criticized the environmental and social costs of large tourist crowds on local residents' quality of life. Quantifying the negative externalities of tourism through economic valuation techniques may provide useful information for balancing the interests of locals and the tourism industry. This could play a role in more sustainable management of tourism in these areas.
Capital budgeting involves evaluating potential investments to increase a firm's value and profitability. Managers must select projects that earn a return higher than the firm's cost of capital. They consider factors like cash flows, costs, lives, and risks of projects to evaluate them using techniques like net present value, internal rate of return, and payback period. The goal is to accept projects that increase shareholder wealth as measured by the net present value.
- BASF is a major international company with over 112,000 employees across 5 continents. It operates in industries like agriculture, chemicals, oil/gas, and plastics.
- In an attempt to increase value, BASF launched Vision 2020, a comprehensive strategic plan that challenged employees to act entrepreneurially. A key goal was for the company to earn its weighted average cost of capital (WACC) plus a premium each year.
- The chapter will explain how to calculate a firm's WACC, which is the minimum return needed to satisfy investors including stockholders, bondholders, and preferred stockholders. It will also discuss when the WACC should and should not be used.
The document discusses fundamental principles of value creation including lessons on value creation, Fred's Hardware case study, discounted cash flow approach, drivers of cash flow and value, and economic profit. It provides examples of how companies can create value by investing capital at returns above their cost of capital. The value of a company is based on expected future cash flows discounted at the required rate of return. Growth, return on invested capital, and cost of capital are key drivers of corporate value.
HOLT Cash and the Corporate Life Cycle White Paper11.2010Michael Oliveros
The document discusses cash usage and corporate life cycles from an investor's perspective. It finds:
1) During growth stages, reinvesting cash into high return projects creates shareholder value, while mature companies may create equal value by returning cash to shareholders.
2) The market values cash based on a company's investment opportunities - cash is discounted for mature firms with low opportunities.
3) As cash surplus increases beyond investment needs, risks of overinvestment, known as "agency costs", also increase as managers may pursue lower return projects against shareholders' interests.
4) Distributing excess cash through dividends or buybacks can create value when agency costs are high due to large cash surpluses and few
This document discusses establishing and planning an enterprise. It covers writing a good business plan that entices investors and communicates the business concept. A business plan should include details about the business, organizers, management, finances, market potential, and risks. It also discusses investing, including determining capital investments, production volume, costs, and evaluating projects using metrics like payback period and net present value. Finally, it covers valuing a business by examining its parts and as a whole going concern, and how valuation depends on opportunities and distress situations.
The document provides guidelines and learning objectives for an assignment on analyzing the Greek debt crisis and determining whether Greece will exit the Euro or rebuild its economy. Students are asked to research the crisis, write a report on their findings, and prepare a 5-minute summary to present to their tutor. They must support their conclusions with relevant financial theory from the course.
The first chapter introduces us to Corporate finance is essential .docxoreo10
The first chapter introduces us to Corporate finance is essential to all managers as it provides all the skills managers need to; Identify corporate strategies and individual projects that add value to the organization and come up with plans for acquiring the funds. The types of business forms are; sole proprietorship, corporation and partnerships. A sole proprietorship form of business possesses different advantages and disadvantages. A partnership maintains roughly similar pros and cons of a sole proprietorship. A corporation is a legal entity that is separate from its owners and managers. Advantages include a smooth transfer of ownership, limited liability, ease of raising capital. The disadvantages include; double taxation, and a high cost of set-up and report filing. The chapter then deals with Objective of the firm, which is to maximize wealth. The final topic is an in-depth look at Financial Securities, which are markets and institutions.
In the second chapter, we are introduced to financial statements, Cash flow and taxes. Financial statements include; the Income statement and the Balance sheet. An income statement is a financial statement that shows a company’s financial performance regarding revenues and expenses, over a particular period, mostly one year. A balance sheet, on the other hand, is a financial statement that states a company’s assets, liabilities and capital at a particular point in time. Under the cash flow, the chapter covers on the Statement of cash flows, indicates how various changes in balance sheet and income statement accounts affect cash and analyses financing, investing and operating activities. A free cash flow shows the cash that an organization is capable of generating after investment to either maintain or expand its database. Under taxes, Corporate and personal taxes are well explained and the scenarios under which they apply.
Chapter Three analyzes Financial Statements. This analysis is broken down into; Ratio Analysis, DuPont equation. The effects of improving ratios, the limitations of ratio analysis and the Qualitative factors. Ratios help in comparison of; one company over time and one company versus other companies. Ratios are used by; Stockholders to estimate future cash flows and risks, lenders to determine their creditworthiness and managers to identify areas of weaknesses and strengths. Liquidity ratios show whether a company can meet its short-term commitments using the resources it has at that particular time. Asset management ratios exemplify how well an organization utilize its assets. Debt management ratios, leverage ratios as well as profitability ratios are explained.
The DuPont equation focuses on several issues. These are; Debt Utilization, Asset utilization and the Expense Control. Consequently, Ratio analysis has various problems and limitations. These include; Distortion of ratios from seasonal factors, various operating and accounting practices can distort comparisons and also it i ...
The document discusses capital structure and dividend policy. It begins by defining capital structure as how a corporation finances its assets through equity, debt, or hybrid securities. It then discusses Modigliani-Miller's theorem which states that in a perfect market, a firm's capital structure does not affect its value. However, in the real world with taxes, bankruptcy costs, and asymmetric information, capital structure does matter. The document outlines various theories for capital structure including trade-off theory and pecking order theory. It also discusses dividend policy and different theories for how dividends may or may not affect firm value such as Gordon's model and Modigliani-Miller's irrelevance theory.
This document provides an overview of various valuation methodologies including multiples-based methods like P/E, price to book, and enterprise value to EBITDA multiples as well as discounted cash flow methods. It discusses steps for using multiples including determining average transaction multiples for comparable firms and industries. It also outlines how to build a discounted cash flow model including templates for income statements, cash flow statements, and considerations for estimating time horizons and costs of debt and equity.
Equity Research 16 December 2002AmericasUnited Stat.docxYASHU40
Equity Research
16 December 2002
Americas/United States
Strategy
Investment Strategy
Assessing the Magnitude and
Sustainability of Value Creation
Illustration by Sente Corporation.
• Sustainable value creation is of prime interest to investors who seek to
anticipate expectations revisions.
• This report develops a systematic way to explain the factors behind a
company’s economic moat.
• We cover industry analysis, firm-specific analysis, and firm interaction.
Investors should assume that CSFB is seeking or will seek investment banking or other business from the covered
companies.
For important disclosure information regarding the Firm's ratings system, valuation methods and potential conflicts of interest,
please visit the website at www.csfb.com/researchdisclosures or call +1 (877) 291-2683.
research team
Michael J. Mauboussin
212 325 3108
[email protected]
Kristen Bartholdson
212 325 2788
[email protected]
Measuring the Moat 16 December 2002
2
Executive Summary
• Sustainable value creation has two dimensions—how much economic profit a
company earns and how long it can earn excess returns. Both are of prime interest to
investors and corporate executives.
• Sustainable value creation is rare. Competitive forces—including innovation—drive
returns toward the cost of capital. Investors should be careful about how much they
pay for future value creation.
• Warren Buffett consistently emphasizes that he wants to buy businesses with
prospects for sustainable value creation. He suggests that buying a business is like
buying a castle surrounded by a moat—a moat that he wants to be deep and wide to
fend off all competition. According to Buffett, economic moats are almost never stable;
competitive forces assure that they’re either getting a little bit wider or a little bit
narrower every day. This report seeks to develop a systematic way to explain the
factors that determine a company’s moat.
• Companies and investors use competitive strategy analysis for two very different
purposes. Companies try to generate returns above the cost of capital, while investors
try to anticipate revisions in expectations for financial performance that enable them to
earn returns above their opportunity cost of capital. If a company’s share price already
captures its prospects for sustainable value creation, investors should expect to earn
a risk-adjusted market return.
• Studies suggest that industry factors dictate about 10-20% of the variation of a firm’s
economic profitability, and that firm-specific effects represent another 20-40%. So a
firm’s strategic positioning has a significant influence on the long-term level of its
economic profits.
• Industry analysis is the appropriate place to start an investigation into sustainable
value creation. We recommend getting a lay of the land—understanding the players, a
review of profit pools, and industry stability—followed ...
The document outlines topics related to stock valuation including: differentiating between debt and equity; features of common and preferred stock; the process of issuing common stock; market efficiency and basic stock valuation models; free cash flow valuation and other approaches like book value and P/E multiples; and the relationships between financial decisions, risk, return, and firm value. The document contains sections on these topics and will provide information to understand concepts of stock valuation.
MBALN-622 Financial Management
Assignment 1
Financial Management – Theory and Application
Deadline
As per the VLE
Learning Objectives for Course
1. Obtain a comprehensive understanding of the financial environment and
adequately define financial terms
2. Have an ability and readiness to formulate, examine and defend business case
judgments, as well as recognize ethical dilemmas and corporate social
responsibility issues in Finance,
3. Conceptually understand the main theories of Corporate Finance and have a
commitment to their practical mathematical application
4. Compare and appraise theories that underlie current thinking in Corporate
Finance and Investment, demonstrate and evaluate how these theories can be
applied in practical situations,
5. Demonstrate effective oral communication of complex ideas and arguments,
possess developed listening skills.
Guidelines for assignment
This is an individual assignment
Ground your answer in relevant theory
Plagiarism and reproduction of someone else’s work as your own will be
penalized
Make use of references, where appropriate – Use Harvard or APA referencing
method.
Late submission implies a deduction of 10 marks per day
Structural elements should include an introduction, main body, and a conclusion
Weight – 40%
Word count guidance: 2500 words (There are 3 Parts to this Assignment)
Type of assignment: Excel Assessed Work Folder
Start / Finish : as per the VLE
Learning Outcome Assessed: 1,2,3,4
PART 1
Assume that for a car manufacturer, Chrysler Ford. Your boss, the chief financial officer, has just handed you
the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm's
ignition line; it would take some time to build up the market for this product, so the cash inflows would increase
over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both
projects have 3-year lives, because Chrysler is planning to introduce entirely new models after 3 years.
Here are the projects net cash flows (in thousands of dollars):
Expected after-tax
Project
S
net cash flows (CFt)
Year (t) Project S Project L 0 1 2 3
0 ($100) ($100) -100 70 50 20
1 70 10
2
50
60
Project
L
3 20 80
0 1 2 3
-100 10 60 80
Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.
The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk
characteristics which are similar to the firm's average project. Chrysler’s weighted average cost of capital is 10%.
You must no determine whether one or both of the projects should be accepted.
Required
Evaluate the projects using the 5 key techniques: (1) payback period, (2) discounted payback period, (3) net
prese ...
FIN 320 Final Project Guidelines and Rubric Final Pro.docxlmelaine
FIN 320 Final Project Guidelines and Rubric
Final Project Part I
Part I Overview
Business professionals typically need to demonstrate a core set of financial knowledge to earn the job and to succeed on a job. For this part of the assessment,
you will be given a scenario in which you are asked to illustrate your financial management knowledge.
This part of the final project addresses the following course outcomes:
Analyze the roles and responsibilities of financial managers in confirming compliance with federal and shareholder requirements
Differentiate between various financial markets and institutions by comparing and contrasting options when selecting appropriate private and corporate
investments
Part I Prompt
You have completed an internship in the finance division of a fast-growing information technology corporation. Your boss, the financial manager, is considering
hiring you for a full-time job. He first wants to evaluate your financial knowledge and has provided you with a short examination. When composing your answers
to this employment examination, ensure that they are cohesive and read like a short essay.
Your submission must address the following critical elements:
I. Analyze Roles and Responsibilities for Compliance
A. Examine the types of decisions financial managers make. How are these decisions related to the primary objective of financial managers?
B. Analyze the various ethical issues a financial manager could potentially face and how these could be handled.
C. Compare and contrast the different federal safeguards that are in place to reduce financial reporting abuse. Why are these considered
appropriate safeguards?
II. Investment Options
A. If a private company is “going public,” what does this mean, and how would the company do this? What are the advantages of doing this? Do
you see any disadvantages? If so, what are they?
B. How do the largest U.S. stock markets differ? Out of those choices, which would be the smartest private investment option, in your opinion?
Why?
C. Compare and contrast the various investment products that are available and the types of institutions that sell them.
Final Project Part I Rubric
Guidelines for Submission: Ensure that your employment examination is submitted as one comprehensive and cohesive short essay. It should use double
spacing, 12-point Times New Roman font, and one-inch margins. Citations should be formatted according to APA style.
Critical Elements Exemplary (100%) Proficient (85%) Needs Improvement (55%) Not Evident (0%) Value
Roles and
Responsibilities:
Examine
Meets “Proficient” criteria and
includes examples in analysis
Comprehensively examines the
types of decisions financial
managers make, including how
these decisions are related to
their primary objective
Examines the types of decisions
financial managers make,
including how these decisions are
related to their primary objective,
but ...
Accounting Principle 6th Edition Weygandt Test BankGaybestsarae
Full download : https://alibabadownload.com/product/accounting-principle-6th-edition-weygandt-test-bank/ Accounting Principle 6th Edition Weygandt Test Bank , Accounting Principle,Weygandt,6th Edition,Test Bank
This document provides information about capital budgeting. It begins with an introduction to capital budgeting, defining it as a firm's process for acquiring and investing capital in long-term projects. It then discusses the capital budgeting process, which includes project generation, evaluation, selection, and follow-up. Key factors that influence capital budgeting decisions are also outlined, such as business risk, tax exposure, financial flexibility, and growth rate. Finally, traditional capital budgeting methods like payback period, accounting rate of return, and discounted cash flow methods are explained.
The key responsibilities of corporate finance include maximizing shareholder wealth through achieving high returns on investments and low-cost financing. Projects are evaluated using discounted cash flow analysis rather than accounting profits. A company can be restructured through an IPO, going private, or mergers and acquisitions seeking synergies or undervalued targets. Corporate governance aims to balance interests of stakeholders to maximize shareholder value in efficient markets.
This document is a project submitted by Raghav Aggarwal to Chitkara Business School in partial fulfillment of an MBA degree. It examines research conducted on equity mutual funds and learning advanced technical analysis patterns under the supervision of CA Aman Chugh of MarketConnected. The project aims to study whether mutual funds provide higher returns than directly investing in their top holdings over a 3-year period. It also aims to learn advanced technical analysis patterns to identify meaningful entry and exit levels in stocks. The methodology involves analyzing the returns of 4 mutual funds against the weighted returns of their top 10 holdings from 2013-2015. Technical patterns are also examined on actual market data. The conclusion compares the returns of investing directly in top holdings versus through
Similar to New capital _ The deal valuation,structure n negotation (20)
The document discusses various options for harvesting or exiting a successful business venture, including capitalizing on growth through an initial public offering, management buyout, merger or acquisition, or outright sale. It also emphasizes the importance of renewing the entrepreneurial system by reinvesting in new companies and community activities. Finally, it provides seven points of advice for entrepreneurial success, stressing the importance of passion, competitiveness, teaching others, managing cash flow, and viewing entrepreneurship as a human rather than just financial process.
This document discusses conceptualizing a model for technology transfer. It covers several key aspects: (1) the theoretical issues and systematic modeling of technology transfer, (2) the three aspects of technology transfer - general transfer, appropriate technology transfer, and sustainable technology transfer, (3) emphasizing political, commercial, and operational relevance dimensions in conceptualizing a technology transfer model.
The document discusses three perspectives on classifying technology:
1. The organization-managerial framework views technology as involving more than just machinery, and refers to the information, equipment, techniques and processes needed to transform inputs into outputs in an organization.
2. The techno-economics approach integrates technology and technical considerations into economic analysis, viewing technology as the means of transforming natural resources into produced resources.
3. The dynamic interaction components approach identifies four interacting elements - technoware, humanware, inforware, and orgaware - that represent the core technology, knowledge storage, and organizational control.
Technology can be viewed as a process involving the transfer and integration of resources, production methods, knowledge, and embodied knowledge in tools. It is a key driver of economic development and national competitiveness. There are various ways to classify technology based on its application, knowledge base, level of development, labor or capital intensity, and more. Viewing technology through engineering and economic approaches provides different perspectives on how it transforms inputs into outputs and impacts productivity. Ensuring the effective implementation and sustained use of transferred technology requires addressing factors like training, adaptation, infrastructure, and management practices.
This document contains a list of company names, codes, addresses, phone numbers, fax numbers, emails, websites, contact persons, and positions. There are over 100 companies listed from various states in Malaysia across many different industries. The list provides key contact information for each company.
The document discusses the key elements of a marketing plan, including marketing strategy, positioning, points of differentiation, pricing, promotional mix, sales process, distribution strategy. It provides brief definitions and examples for each element, emphasizing the importance of an overall marketing strategy that incorporates positioning of a firm's products or services relative to competitors, clear differentiation from other offers, and determining appropriate pricing, promotional, sales, and distribution approaches.
The document discusses key aspects of conducting a market analysis for a new business venture. It covers segmenting the market and selecting a target market segment based on factors like customer needs, size, and profitability. It also discusses analyzing competitors, estimating potential market share and sales, and gathering intelligence about competitors' positions and opportunities. The goal of the market analysis is to help define the business and ensure it has a well-thought out target customer base to focus on generating sales.
This document provides an overview of the key sections and content that should be included in a business plan. It discusses that a business plan is a 25-35 page written document that explains all aspects of a new business venture and is provided to investors. The document outlines that an effective business plan includes an executive summary, company description, products/services, management team, and financial projections. It provides details on the content that should be covered in each of these main sections.
The document discusses developing and screening business ideas. It identifies the three most common sources of new business ideas as changing environmental trends, unsolved problems, and gaps in the marketplace. It also describes techniques for generating ideas such as brainstorming and focus groups. Finally, it outlines the five parts of the "First Screen" process for assessing the feasibility of a business idea: the strength of the idea, industry issues, market/customer issues, founder issues, and financial issues.
The document discusses the purpose and importance of a business plan. It explains that a business plan is used both internally to guide a business and externally to attract investors and stakeholders. The document provides guidance on the key components and structure of an effective business plan, including an executive summary, descriptions of the opportunity, team, and market. It also discusses different types of businesses and notes that a business plan should allow for changes during a startup's evolution.
The document discusses the concept of appropriate technology for developing nations. It defines appropriate technology as choices that catalyze growth by considering technological, economic, social, political, environmental, and legal factors. Appropriate technology should be labor intensive, use low technology, and be knowledge-based. It should also satisfy criteria like effectiveness, affordability, cultural acceptability, and sustainability. The success of technology transfers depends on how appropriate the technology is for the conditions in the developing country.
This document discusses technology transfer models for developing nations. It describes several key challenges for developing countries, including lack of technological resources and skills. Effective technology transfer requires overcoming obstacles such as cultural differences, low incomes, and political instability. The success of transfers depends on long-term cooperation between host and home nations and stimulating marginal improvements. Developing nations must consider both internal and external factors to build appropriate technological infrastructure, orientation, skills, and production capacity through transfers.
This document discusses technology transfer and its concepts. It defines technology as the practical application of science to commerce or industry. Technology transfer is defined as the process of sharing skills, knowledge, technologies, and methods among governments and institutions to make scientific and technological developments more accessible. The key modes of technology transfer discussed are licensing, foreign direct investment, and joint ventures. Developing countries can benefit from technology transfer through more efficient resource use, industrialization, and socio-economic development.
New capital _ The deal valuation,structure n negotation
1. 15
Chapter Fifteen
The Deal: Valuation, Structure, and Negotiation
Results Expected
Upon completion of this chapter you will have:
1. Determined methodologies used by venture capitalists and professional investors to
estimate the value of a company.
2. Examined how equity proportions are allocated to investors.
3. Studied how deals are structured, including critical terms, conditions, and covenants.
4. Examined key aspects of negotiating and closing deals.
5. Characterized good versus bad deals and identified some of the sand traps entrepreneurs
face in venture financing.
6. Analyzed an actual deal presented to an entrepreneur in the “Bridge Capital Investors”
case study.
Teaching Pedagogies
There are four pedagogical options the chapter that you can consider when conducting
class sessions. These notes are organized to enable you to create whatever format and blend of
these teaching plans that you'd like. The four pedagogies are:
1. a lecture or mini-lecture
2. the traditional case study
3. the use of exercises or role plays
4. a combination of the above.
The syllabi earlier in this Instructor's Manual (pages 28-53) also illustrate how some
instructors have blended the pedagogies.
Lecture Outline
I. The Art and Craft of Valuation.
A. The entrepreneur’s world of finance is very different from
- 39 -39
Chapter 15
2. corporate finance of public companies.
B. The private capital world of entrepreneurial finance is more
volatile, more imperfect, and less accessible than capital
markets.
1. The sources of capital are different.
2. The companies are much younger and the environment
more rapidly changing.
3. Cash is king, and liquidity and timing are everything.
4. The determination of a company’s value is elusive.
II. What Is a Company Worth?
A. It all depends—the market for private companies is very
imperfect.
B. Determinants of Value.
1. The criteria and methods used to value companies
traded publicly have severe limitations.
2. The ingredients to the entrepreneurial valuation are
cash, time, and risk.
C. Long-Term Value Creation versus Quarterly Earnings.
1. An entrepreneur’s core mission is to build the best
company possible.
2. Building long-term value is more important than
maximizing quarterly earnings.
D. Psychological Factors Determining Value.
1. At market peaks, price/earnings have exceeded 20 times
earnings.
2. During the dot.com bubble from 1999 to early 2000,
valuations were more extreme.
3. Behind this is a psychological wave, a combination of
euphoric enthusiasm exacerbated by greed and fear of
missing the run up.
E. A Theoretical Perspective.
1. There are at least a dozen different ways of determining
the value of a private company.
2. It can be a mistake to approach valuation in hopes of
arriving at a single number.
3. It is more realistic to set a range of values within which
the buyer and the seller need to negotiate.
F. Investor’s Required Rate of Return (IIRR).
1. Various investors will require a different rate of return
(ROR) for investments in different stages of
development.
2. Factors underlying the required ROR include premium
Text Exhibit 15.1
“Rate of Return Sought by
Venture Capital Investors”
summarizes the annual rates of
return that venture capital
investors seek on investments
by stage of development and
how long they expect to hold
these investments.
Also:
Transparency Master 15-1
“Rate of Return Sought by
Venture Capital Investors”
40 Chapter 15
3. for systemic risk, illiquidity, and value added.
G. Investor’s Required Share of Ownership.
1. The rate of return required by the investor determines
the investor’s required share of the ownership.
2. Text Exhibit 15.2 illustrates this calculation.
3. By changing any of the key variables, the results will
change accordingly.
(Text Exhibit 15.1)
Results Expected #2
Examined how equity
proportions are allocated to
investors.
Text Exhibit 15.2
“Investor’s Required Share of
Ownership under Various
ROR Objectives” shows how
rate of return required
determines the investor’s
required share of ownership.
Also:
Transparency Master 15-2
“Investor’s Reqauiried Share
of Ownership under Various
ROR Objectives” (Text
Exhibit 15.2)
III. The Theory of Company Pricing.
A. The capital market food chain depicts the evolution of a
company from its idea stage through an initial public offering
(IPO.)
1. The appetite of the various sources of capital varyied by
company size, stage, and amount of money invested.
2. Entrepreneurs who understand the food chain are better
prepared to target fund-raising strategies.
B. The Theory of Company Pricing is simplistically depicted in
Text Exhibit 15.4.
1. A venture capital investor envisions two to three rounds
of financing.
2. The per share equivalent increases with each round: four
to five4 to 5 times markup to Series B, followed by a
double markup to Series B, then again by double markup
to Series C.
Text Exhibit 15.3
“The Capital Markets Food
Chain for Entrepreneurial
Ventures” depicts the “food
chain” of sources and amounts
of capital needed at each stage
of development.
Text Exhibit 15.4
“Theory of Company
Pricing” shows a simplistic
depiction of the per-share
pricing expected at each
progressive series of financing.
Also:
Transparency Master 15-3
“Theory of Company
Pricing” (Text Exhibit 15.4)
IV. The Reality.
A. The venture capital industry has exploded in the past 25 years.
1. Current market conditions, deal flow, and relative
bargaining power influence the actual deal.
2. The dot.com implosion led to much lower values for
private companies.
B. The Down Round or Cram Down circa 2003.
1. In this environment, entrepreneurs face rude shocks in
the second or third round of financing.
2. Instead of a four or even five times increase in the
Text Exhibit 15.5
“The Reality” shows how
current market conditions, deal
flow, and relative bargaining
power influence the actual deal
struck.
Also:
Transparency Master 15-4
“The Reality” (Text Exhibit
15.5)
Text Exhibit 15.6
Instructor’s Manual 41
4. valuation from Series A to B, or B to C, entrepreneurs
encounter a “cram down” round.
3. The price is typically one-fourth to two-thirds of the last
round, severely diluting the founders’ ownership.
4. In many financings in 2001 and 2002, heavy onerous
additional conditions were imposed.
5. The valuation of a company is vulnerable and volatile.
6. Even strongly performing companies were crammed
down in this market environment.
7. Underperforming companies had difficulty finding any
financing.
“The Reality: The Down
Round” shows the loss of
valuation that can occur during
the second round of financing,
the “cram down”
Also:
Transparency Master 15-5
“The Reality: The Down
Round” (Text Exhibit 125.6)
V. Valuation Methods.
A. The Venture Capital Method.
1. is appropriate for investments in a company with
negative cash flows at the time of the investment, but
which anticipates significant earnings in a number of
years.
21. Venture capitalists are the most likely investors to
participate in this type of investment.
32. The steps involved are:
a. Estimate the company’s net income in a number
of years.
b. Determine the appropriate price-to-earnings ratio,
or P/E ratio.
c. Calculate the projected terminal value by
multiplying net income and the P/E ratio.
d. The terminal value can then be discounted to find
the present value of the investment.
e. To determine the investor’s required percentage
of ownership, the initial investment is divided by
the estimated present value.
f. Finally, the number of shares and the share price
must be calculated.
B. The Fundamental Method is simply the present value of the
future earnings stream.
C. The First Chicago Method.
1. The method, developed at First Chicago Corporation’s
venture capital group, employs a lower discount rate,
but applies it to an expected cash flow.
2. That expected cash flow is the average of three possible
scenarios.
3. The formula is presented in Transparency Master 15-
8.
Results Expected #1
Determined methodologies
used by venture capitalists and
professional investors to
estimate the value of a
company.
Transparency Master 15-6A
“The Venture Capital
Method, Part A:: Final
Ownership” summarizes the
calculations involved in
determining the final ownership
required using the venture
capital method.
Transparency Master 15-6B
“The Venture Capital
Method, Part B:: New
Shares” shows the calculations
involved in determining the
number of new shares.
Text Exhibit 15.7
“Example of the
Fundamental Method” shows
the calculations used to
determine the present value of
the future earnings stream.
Also:
Transparency Master 15-7
“Example of the
Fundamental Method” (Text
Exhibit 15.7)
42 Chapter 15
5. 4. This formula differs in two ways:
a. The basic formula assumes there are no cash
flows between the investment and the harvest.
b. The basic formula does not distinguish between
the forecast terminal value and the expected
terminal value.
5. Text Exhibit 15.8 is an example of using this method.
D. Ownership Dilution.
1. The previous example is unrealistic because several
rounds of investments are necessary to finance a high-
potential venture.
2. As illustrated in Text Exhibit 15.9, three rounds of
financing are expected.
3. The final ownership that each investor must be left with,
given a terminal price/earnings ratio of 15, can be
calculated using the formula presented in Transparency
Master 15.10.
E. Discounted Cash Flow.
1. In a simple discounted cash flow method, three periods
are defined:
a. Years 1-5.
b. Years 6-10.
c. Year 11 to infinity.
2. The necessary operating assumptions are initial sales,
growth rates, EBIAT/sales, and (net fixed assets +
operating working capital)/sales.
3. The discount rate can be applied to the weighted average
cost of capital (WACC.)
4. Then the value for free cash flow (Years 1-10) is added
to the terminal value.
F. Other Rule-of-Thumb Valuation Methods.
1. Other valuation methods are based on similar, most
recent transactions of similar firms.
2. Venture capitalists know the activity in the current
marketplace for private capital.
3. These methods are used most often to value an existing
company rather than a startup.
Transparency Master 15-8
“The Formula for the First
Chicago Method” gives the
formula used to calculate
required final ownership using
the First Chicago Method.
Text Exhibit 15.8
“Example of the First
Chicago Method” presents the
First Chicago Method
calculation of valuation based
on the average of three possible
scenarios.
Also:
Transparency Master 15-9
“Example of the First
Chicago Method” (Text
Exhibit 15.8)
Text Exhibit 15.9
“Example of a Three-Stage
Financing” presents a pricing
worksheet in which three
financing rounds are expected.
Transparency Master 15-10
“Dilution of Final
Ownership” shows how to
determine the final ownership
that each investor must be left
with, given a terminal
price/earnings ratio of 15.
Text Exhibit 15.9
“Example of a Three-Stage
Financing” shows
VI. Tar Pits Facing Entrepreneurs.
A. There are several inherent conflicts between entrepreneurs, or
the users of capital, and the investors, or the suppliers of
capital.
1. The entrepreneur wants to have as much time as
Instructor’s Manual 43
6. possible for the financing, while the investors want to
supply capital just in time.
2. Users of capital want to raise as much money as
possible, while the investors want to supply just enough
capital in staged commitments.
3. In the negotiations of a deal, each side balances and deal
terms.
B. The styles of providers and users of capital differ.
1. The users value their independence and flexibility.
2. The investors are hoping to preserve their options.
C. There are also clashesd in the composition of the board of
directors.
1. The entrepreneur seeks control and independence.
2. The investors want the right to control the board if the
company does not perform as well as expected.
D. The long-term goals of the users and suppliers of capital may
also be contradictory.
1. The entrepreneurs may be content with the progress of
their venture.
2. The investors will want their capital to produce
extraordinary gains.
E. Management styles also differ.
1. The entrepreneur is willing to take a calculated risk or to
minimize unnecessary risks.
2. The investor is willing to accept higher risks for higher
return.
3. Entrepreneurs see opportunities and seize those
opportunities.them.
4. Investors are looking for clear steady progress.
F. The ultimate goals may differ.
1. The entrepreneur views success as a process of long-
term company building.
2. The investors will want to cdash out in two to five years.
VII. Staged Capital Commitments.
A. Venture capitalists rarely invest all their external capital that a
company will require.
1. Instead, they invest in companies at distinct stages in
their development.
2. By staging capital, the venture capitalists preserve the
right to abandon a project whose prospects look dim.
B. Staging the capital also provides incentives to the
entrepreneurial team.
44 Chapter 15
7. 1. To encourage managers to conserve capital, venture
capital firms apply strong sanctions if capital is misused.
a. Increased capital requirements invariably dilute
management’s equity share.
b. The staged investment process enables venture
capital firms to shut down operations.
2. The threat by investors to abandon a venture is a key
incentive for entrepreneurs.
C. Venture capitalists can also discipline wayward managers by
firing or demoting them.
1. The stock purchase agreement then becomes important.
2. Noncompete clauses can impose strong penalties on
those who leave.
D. Entrepreneurs understand that if they meet those goals, they
will end up owning a significantly larger share of the company
than if they insisted on receiving all the capital up front.
VIII. Structuring the Deal.
A. What Is a Deal?
1. Deals are economic agreements between at least two
parties.
2. A way of thinking about deals over time: William A.
Sahlman from Harvard Business School suggest a series
of questions—presented on page 510—as a guide for
deal makers.
3. The characteristics of successful deals are presented in
Transparency Master 15-11.
4. The Generic Elements of Deals.
a. The deal includes value distribution, basic
definitions, assumptions, performance incentives,
rights, and obligations.
b. It also involves mechanisms for transmitting
timely, credible information, plus negative and
positive covenants, default clauses, and remedial
action clauses.
5. Tools for Managing Risk/Reward.
a. The claims on cash and equity are prioritized by
the players.
b. Tools available are common stock, partnerships,
preferred stock, debt, performance conditional
pricing, puts and calls, warrants, and cash.
c. Nonmonetary tools include:
• Number, type, and mix of stocks.
Results Expected #3
Studied how deals are
structured, including critical
terms, conditions, and
covenants.
Transparency Master 15-11
“Characteristics of Successful
Deals” shows some of the
characteristics of deals that
have proven successful over
time.
Instructor’s Manual 45
8. • The number of seats on the board of directors.
• Possible changes in the management team and
in the composition of the board.
• Specific performance targets for revenues,
expenses, market penetration, and the like.
B. Understanding the Bets.
1. Deals are based on cash, risk, and time, and are subject
to interpretation.
2. Various valuation methods contribute to the complexity
of deals.
3. The text presents three examples of term sheets.
4. The entrepreneur needs to identify the underlying
assumptions, motivations, and beliefs of the individuals
proposing the deals.
C. Some of the Lessons Learned: The Dog in the Suitcase.
1. Raising capital can have all the surprises of a “dog in
the suitcase.”
2. Tips that can help minimize many of these surprises:
a. Raise money when you do not need it.
b. Learn as much about the process and how to
manage it as you can.
c. Know your relative bargaining position.
d. If all you get is money, you are not getting much.
e. Assume the deal will never close.
f. Always have a backup source of capital.
g. The legal and other experts can blow it.
h. Users of capital are invariably at a disadvantage in
dealing with the suppliers of capital.
i. If you are out of cash when you seek to raise
capital, suppliers of capital will eat you for lunch.
j. Startup entrepreneurs are raising capital for the
first time; suppliers of capital have done it many
times.
IX. Negotiations.
A. Negotiations have been defined by many experts in many ways.
B. What Is Negotiable?
1. It is possible for an entrepreneur to negotiate and craft
an agreement that represents his or her needs.
2. During the negotiation, both the investors and the
entrepreneur have the opportunity to size each other up.
3. Successful negotiation is one in which both sides
Results Expected #4
Examined key aspects of
negotiating and closing deals.
46 Chapter 15
9. believe they have made a fair deal.
4. The best deals are those in which neither party wins and
neither loses.
5. Instead of soft or hard negotiation tactics, an approach
based on principle negotiation has been developed.
6. Principled negotiation is based on four points:
a. People: Separate the people from the problem.
b. Interests: Focus on interests, not positions.
c. Options: Generate a variety of possibilities before
deciding what to do.
d. Criteria: Insist that they result be based on some
objective standard.
7. By being reasonable, you’ll have a better chance of
getting what you want.
C. The Specific Issues Entrepreneurs Typically Face.
1. The primary focus is likely to be on how much the
entrepreneur’s equity is worth and how much is to be
purchased by the investor’s investment.
a. Other issues involving legal and financial control
of the company and the rights and obligations of
investors and entrepreneurs.
b. Another issue is the value behind the money that a
particular investor can bring to the venture.
2. Many of the tools for managing risk/reward discussed in
the previous section also apply.
3. Subtle but highly significant issues may be negotiated;
a. Co-sale provision, by which investors can tender
their shares of their stock before an initial public
offering.
b. Ratchet antidilution protection, which enables the
lead investors to get free additional common stock
if subsequent shares are ever sold at a price lower
than originally paid.
c. Washout financing, which wipes out all
previously issued stock when existing preferred
shareholders will not commit additional funds.
d. Forced buyout, allowing the investor to find a
buyer if management cannot.
e. Demand registration rights for at least one IPO in
three to five years.
f. Piggyback registration rights grant rights to sell
stock at the IPO.
g. Key-person insurance, requiring the company to
obtain life insurance on key people.
Instructor’s Manual 47
10. D. The Term Sheet.
1. Regardless of the source of capital, the entrepreneur will
want to be informed about the terms and conditions that
govern the deal signed.
2. For example, there are four common instruments:
a. Fully participating preferred stock.
b. Partially participating preferred stock.
c. Common preference.
d. Nonparticipating preferred stock.
3. As presented in Text Exhibit 15.10, there can be up to a
$24 million difference in the payout received in each of
these four instruments.
E Black Box Technology, Inc., Term Sheet.
1. One excellent presentation of the deal structure, term
sheet contents, and their implications is presented in
Black Box Technology, Inc.—Term Sheet.
2. This term sheet is a blue print for successful
negotiations.
Text Exhibit 15.10
“Considering the Economics:
$200 Million IPO or
Acquisition?” shows the
different economic
consequences of using four
common instruments.
Also:
Transparency Master 15-12
“Considering the Economics:
$200 Million IPO or
Acquisition?” (Text Exhibit
15.10)
X. Sand Traps.
A. Strategic Circumference.
1. Each fund-raising strategy causes actions and
commitments that will eventually scribe a strategic
circumference around the company.
2. The entrepreneur needs to think through the
consequences of each fund-raising strategy.
3. Scribing a strategic circumference may be intentional, or
may be unintended and unexpected.
B. Legal Circumference.
1. Legal documentation spells out the terms, conditions,
responsibilities, and rights of the parties to a transaction.
2. Because these details come at the end of the fund-
raising process, an entrepreneur may arrive at a point of
no return.
3. To avoid this trap, entrepreneurs need to sweat the
details.
Results Expected #5
Characterized good versus bad
deals and identified some of the
sand traps entrepreneurs face in
venture financing.
48 Chapter 15
11. a. It is very risky for an entrepreneur not to carefully
read final documents.
b. It is also risky to use a lawyer who is not
experienced and competent.
C. Attraction to Status and Size.
1. Simply targeting the largest or the best-known firms is a
trap entrepreneurs often fall into.
2. Such firms may or may not be a good fit.
3. It is best to focus your efforts toward financial backers,
whether debt or equity, who have intimate knowledge
and experience in the competitive area.
D. Unknown Territory.
1. Entrepreneurs need to know the terrain, particularly the
requirements and alternatives of various equity sources.
2. A venture that is not a “mainstream venture capital
deal” may be overvalued and directed to investors who
are not a realistic match.
3. The text uses the example of “Opti-Com”’s” ill-directed
search for suitable venture capital.
E. Opportunity Cost.
1. An entrepreneur’s optimism can lead to grossly
underestimating the real costs of getting the cash in the
bank.
a. They also underestimate the real time, effort, and
creative energy required.
b. There are opportunity costs in expending these
resources in a particular direction when both the
clock and the calendar are moving.
2. In the months it takes to develop a capital source, cash
and human capital might have been better spent
elsewhere.
3. It is common for top management to devote as much as
half of its time trying to raise a major amount of outside
capital.
a. The effect on near-term performance is invariably
negative.
b. If high expectations are followed by a failure,
morale can deteriorate and key people can be lost.
4. Significant opportunity cost are also incurred in forgone
business and market opportunities.
F. Underestimation of Other Costs.
1. Entrepreneurs tend to underestimate the out-of-pocket
costs associated with both raising money and living with
it.
Instructor’s Manual 49
12. a. The Securities and Exchange Commission
requires regular audited financial statements.
b. There are also outside directors’ fees and liability
insurance premiums, legal fees, and so on.
2. Another “cost” is of the disclosure that may be
necessary to secure a backer.
a. Personal and company details may need to be
revealed to people whom the entrepreneur does
not really know and trust.
b. The ability to control access to the information is
also lost.
G. Greed: The entrepreneur may find the money irresistible
H. Being Too Anxious.
1. Another trap is believing that the deal is done and
terminating discussions with others too soon.
2. Entrepreneurs want to believe the deal is done with a
handshake.
3. The entrepreneur may need to create an illusion of
multiple financing options.
I. Impatience.
1. Another trap is being impatient when an investor does
not understand quickly.
2. If the entrepreneur becomes too impatient, they expose
themselves to additional risk.
J. Take-the-Money-and-Run Myopia.
1. This trap prevents an entrepreneur from evaluating to
what extent the investor can add value to the company
beyond money.
2. In this trap the entrepreneur does not adequately
consider the prospective financial partner’s relevant
experience and know-how in the market and the
contacts the entrepreneur needs.
3. Many founders overlook the high value-added
contributions and erroneously opt for a “better deal.”
XI. Chapter Summary.
Answers to Study Questions
1. Why can there be such wide variations in the valuations investors and founders place on
the companies?
The determination of a company’s value is more art than science. Unlike the market for
public companies, the market for private companies is very imperfect. The criteria and methods
50 Chapter 15
13. used to value companies traded publicly have severe limitations when applied to entrepreneurial
companies.
2. What are the determinants of value?
The ingredients to the entrepreneurial valuation are cash, time, and risk. The amount of
cash available and the cash generated play an important role in valuation. Timing of the deal
plays an influential role. Finally, risk or perception of risk contributes to the determination of
value. “The greater the risk, the greater the reward” plays a role in how investors value the
venture.
3. Define and explain why the following are important: long-term value creation, investor’s
required IRR, investor’s required share of ownership, DCF, deal structure, and sand
traps in fund-raising.
Long-term value creation means building the best company possible. This is theo core
mission of the entrepreneur. Creating value for the long-run is very different from simply
maximizing quarterly earnings to attain the highest share price possible.
Investor’s required rate of return (IRR) is the annual rate of return that venture capital
investors seek on investments. The required ROR is a function of premium for systemic risk,
illiquidity, value added, stage of development, and amount of capital invested.
Investor’s required share of ownership is the percentage of the venture which the
investor seeks to obtain. This involves computing the future value of the company. The rate of
return required determines the investor’s required share.
DCF is the discounted cash flow, based on three time frames. This is calculated by using
initial sales, growth rates, EBIAT, and working capital in each time period. The discount rate can
be applied to the weighted average cost of capital. Then the value for free cash flow is added to
the terminal value.
Deal structure is the set of negotiated agreements between investor and entrepreneur.
Most deals involve the allocation of cash flow streams, the allocation of risk, and allocation of
value between the different groups. The deal includes value distribution, basic definitions,
assumptions, performance incentives, rights, and obligations.
Sand traps in fund-raising are the pitfalls a venture can fall into when trying to obtain
financing. These include strategic circumference, legal circumference, attraction to status and
size, unknown territory, opportunity cost, underestimation of other costs, greed, being too
anxious, impatience, and take-the-money-and-run myopia.
4. Explain five prevalent methods used in valuing a company and their strengths and
weaknesses, given their underlying assumptions.
The venture capital method is appropriate for investments in a company with negative
cash flows at the time of the investment, but which anticipates significant earnings in a number of
years. Venture capitalists are the most likely investors to participate in this type of investment.
The steps involved are:
(1) Estimate the company’s net income in a number of years.
(2). Determine the appropriate price-to-earnings ratio, or P/E ratio.
(3) Calculate the projected terminal value by multiplying net income and the P/E ratio.
(4) The terminal value can then be discounted to find the present value of the
investment.
Instructor’s Manual 51
14. (5) To determine the investor’s required percentage of ownership, the initial
investment is divided by the estimated present value.
(6) Finally, the number of shares and the share price must be calculated.
This method is commonly used by venture capitalists because they make equity
investments in industries often requiring a large initial investment with significant projected
revenues. The percentage of ownership is a key issue in the negotiations.
The fundamental method is simply the present value of the future earnings stream.
The First Chicago Method, developed at First Chicago Corporation’s venture capital
group, employs a lower discount rate, but applies it to an expected cash flow. That expected cash
flow is the average of three possible scenarios, with each scenario weighted according to its
perceived probability. The formula is presented in Transparency Master 15-8. This formula
differs in two ways:
(1) The basic formula assumes there are no cash flows between the investment and the
harvest.
(2) The basic formula does not distinguish between the forecast terminal value and the
expected terminal value.
The traditional method uses the forecast terminal value, which is adjusted through the use
of a high discount rate.
The ownership dilution method considers the discount rates that are most likely to be
applied in succeeding rounds. The previous valuation example is unrealistic because several
rounds of investments are necessary to finance a high-potential venture. As illustrated in Text
Exhibit 15.9, three rounds of financing are expected. In addition to estimating the appropriate
discount rate for the current round, the first round venture capitalist must now estimate the
discount rates that are most likely to be applied in the following rounds. The final ownership that
each investor must be left with, given a terminal price/earnings ratio of 15, can be calculated
using the formula presented in Transparency Master 15.10.
In a simple discounted cash flow method, three periods are defined: Years 1-5. Years 6-
10, and Year 11 to infinity. The necessary operating assumptions are initial sales, growth rates,
EBIAT/sales, and (net fixed as-sets + operating working capital)/sales. Using this method, one
should also note relationships and trade-offs. The discount rate can be applied to the weighted
average cost of capital (WACC.) Then the value for free cash flow (Years 1-10) is added to the
terminal value.
There are other valuation methods based on similar, most recent transactions of similar
firms. Venture capitalists know the activity in the current marketplace for private capital. These
methods are used most often to value an ex-isting company rather than a startup.
5. What is a staged capital commitment, and why is it important?
Venture capitalists will rarely, if ever, invest all the external capital that a company will
require to accomplish its business plan; instead, they invest in companies at distinct stages in their
development. By staging capital, the venture capitalists preserve the right to abandon a project
whose prospects look dim. Staging the capital also provides incentives for the management team.
6. What is a company worth: explain the theory and the reality of valuation.
A company evolves from its idea stage through an initial public offering (IPO.) The
appetite of various sources of capital varies by company size, stage, and amount of money
invested. In the theory of company pricing, a venture capital investor envisions two to three
52 Chapter 15
15. rounds. The per share equivalent increases with each round: four to five times markup to Series
B, followed by a double markup to Series B, then again by double markup to Series C.
In reality, current market conditions, deal flow, and relative bargaining power influence
the actual deal struck. Changes in the overall market can radically impact the valuation of a
company. During the dot.com bubble from 1998 to early 2000, the valuations became extreme—
some companies were valued at 10 times revenue. When the collapse came, even strongly
performing companies saw their valuations plummet. In this environment, the price per share of
ventures may actually decline in the second round of financing, diluting the founder’s
ownership.````````
7. What is a “cram down” round?
Ventures typically go through three to four rounds of financing from idea stage to initial
public offering. In theory, the per share equivalent increases with each round: four to five times
markup to Series B, followed by a double markup to Series B, then again by double markup to
Series C. In reality entrepreneurs face rude shocks in the second or third round of financing.
Instead of a substantial four or even five times increase in the valuation from Series A to B, or B
to C, they are jolted with a “cram down” round, in which the price is typically one-fourth to two-
thirds of the last round.x
8. What are some of the inherent conflicts between investors and entrepreneurs, and how
and why can these affect the venture’s odds for success?
There are several inherent conflicts between entrepreneurs, or the users of capital, and the
investors, or the suppliers of capital. The entrepreneur wants to have as much time as possible for
the financing, while the investors want to supply capital just in time.
Users of capital want to raise as much money as possible, while the investors want to
supply just enough capital in staged commitments. In the negotiations of a deal, each side
balances capital and deal terms.
The styles of providers and users of capital differ. The users value their independence and
treasure the flexibility their own venture has brought them. However, the investors are hoping to
preserve their options, including reinvesting and abandoning the venture.
There are also clashes in the composition of the board of directors. The entrepreneur
seeks control and independence. The investors want the right to control the board if the company
does not perform as well as expected.
The long-term goals of the users and suppliers of capital may also be contradictory. The
entrepreneurs may be content with the progress of their venture and happy with a single or
double. The investors will not be quite as content with moderate success, but instead want their
capital to produce extraordinary gains.
Management styles also differ. The entrepreneur is willing to take a calculated risk or is
working to minimize or avoid unnecessary risks. The investor is willing to accept higher risks for
higher return.
Entrepreneurs see opportunities and seize those opportunities. Investors are looking for
clear steady progress.
The ultimate goals may differ, also. The entrepreneur views success as a process of long-
term company building. The investors will want to cash out in two to five years.x
9. What are the most important questions and issues to consider in structuring a deal?
Why?
Instructor’s Manual 53
16. Most deals involve the allocation of cash flow steams, the allocation of risk, and the
allocation of value between different groups. To design long-lived deals, Professor William A.
Sahlman from Harvard Business School suggests using a series of questions as a guideline for
structuring deals. These questions include: Who are the players? What are their goals and
objectives? What risks do they perceive and how have these risks been managed? What problems
do they perceive? How much do they have invested? What is the context surrounding the current
decision? What is the form of their current investment or claim on the company? What power do
they have to act? To precipitate change? What real options do they have? What credible threats
do they have? How and from whom do they get information? What will be the value of their
claim under different scenarios? How can they get value from their claims? To what degree can
they appropriate value from another party? How much uncertainty characterizes the situation?
What are the rules of the game? What is the context at the current time? x
10. What issues can be negotiated in a venture investment, and why are these important?
Far more is negotiable than entrepreneurs think. The “boilerplate” investors use may not
be fixed in concrete. It is possible for an entrepreneur to negotiate and craft an agreement that
represents his or her needs. A successful negotiation is one in which both sides believe they have
made a fair deal.
The primary focus is likely to be on how much the entrepreneur’s equity is worth and
how much is to be purchased by the investor’s investment. Other issues involving legal and
financial control of the company and the rights and obligations of investors and entrepreneurs.
Another issue is the value behind the money that a particular investor can bring to the venture.
Many of the tools for managing risk/reward also apply.
Subtle but highly significant issues may be negotiated, including co-sale provision,
ratchet antidilution protection, washout financing, forced buyout, demand registration rights,
piggyback registration, and key-person insurance.x
11. What are the pitfalls and sand traps in fund-raising, and why do entrepreneurs
sometimes fail to avoid them?
The entrepreneur encounters numerous strategic, legal, and other “sand traps” during the
fund-raising cycle and needs awareness and skill in coping with them. Some of these sand traps
include:
Strategic circumference. Each fund-raising strategy causes actions and commitments that
will eventually scribe a strategic circumference around the company. The entrepreneur needs to
think through the consequences of each fund-raising strategy. Scribing a strategic circumference
may be intentional, or may be unintended and unexpected.
Legal circumference. Legal documentation spells out the terms, conditions,
responsibilities, and rights of the parties to a transaction. Because these details come at the end of
the fund-raising process, an entrepreneur may arrive at a point of no return. To avoid this trap,
entrepreneurs need to sweat the details. It is very risky for an entrepreneur not to carefully read
final documents and to use a lawyer who is not experienced and competent.
Attraction to status and size. Simply targeting the largest or the best-known firms is a
trap entrepreneurs often fall into. Such firms may or may not be a good fit. It is best to focus your
efforts toward financial backers, whether debt or equity, who have intimate knowledge and
experience in the competitive area.
Unknown territory. Entrepreneurs need to know the terrain, particularly the requirements
and alternatives of various equity sources. A venture that is not a “mainstream venture capital
deal” may be overvalued and directed to investors who are not a realistic match.
54 Chapter 15
17. Opportunity cost. An entrepreneur’s optimism can lead to grossly underestimating the
real costs of getting the cash in the bank. They also underestimate the real time, effort, and
creative energy required. There are opportunity costs in expending these resources in a particular
direction when both the clock and the calendar are moving. In the months it takes to develop a
capital source, cash and human capital might have been better spent elsewhere. It is common for
top management to devote as much as half of its time trying to raise a major amount of outside
capital. Significant opportunity cost are also incurred in forgone business and market
opportunities.
Underestimation of other costs. Entrepreneurs tend to underestimate the out-of-pocket
costs associated with both raising money and living with it. The Securities and Exchange
Commission requires regular audited financial statements. There are also outside directors’ fees
and liability insurance premiums, legal fees, and so on. Another “cost” is of the disclosure that
may be necessary to secure a backer.
Greed: The entrepreneur may find the money irresistible.
Being too anxious. Another trap is believing that the deal is done and terminating
discussions with others too soon. Entrepreneurs want to believe the deal is done with a
handshake. The entrepreneur may need to create an illusion of multiple financing options.
Impatience. Another trap is being impatient when an investor does not understand
quickly. If the entrepreneur becomes too impatient, they expose themselves to additional risk.
Take-the-money-and-run myopia. This trap prevents an entrepreneur from evaluating to
what extent the investor can add value to the company beyond money. In this trap the
entrepreneur does not adequately consider the prospective financial partner’s relevant experience
and know-how in the market and the contacts the entrepreneur needs. Many founders overlook
the high value-added contributions and erroneously opt for a “better deal.” X
Notes on Case
“Bridge Capital Investors, Inc.”
Use of the BCI, inc. Case
This is a case that lends itself to a structuring— – valuing— -- negotiating exercise and
role-play in which pairs or trios as founders meet with pairs or trios as investors to come to terms.
It has worked very well with a variety of groups and students, and enables them to get into the
details and guts of the issues.
Positioning and Objectives
The case can be preceded by outside speakers from various financial sources, and/or your
own lecture on the meat in the chapter. Vu-graph templatesTransparency masters of the key
exhibits and tables in the chapter are available in Section 8.0Part IV of this manual of the key
exhibits and tables in the chapter for this purpose. The chapter also ties in with the Appendixes on
the investment agreement, deal structuring, vesting, sample terms sheet, etc.
Preparation Questions
Students are asked to consider the following questions:
Instructor’s Manual 55
18. 1. Evaluate the situation and financing alternatives Hindman is now facing. What is
his strategy?
2. Is the $10 million Bridge investment enough money? How long will it last? What is
Hindman’s relative bargaining position? BCIs? Be prepared to represent both the
company and BCI in a meeting to negotiate the proposed financing.
3. What are the consequences for JLI of the proposed financing?: Calculate the
consequences of the “put.”
4. What should Hindman do? What should Bridge do?
In this case study we rejoin Jiffy Lube in November, 1985, two and one half years down
the road from the Hindman case. Briefly describe to students what has happened to the company:
Since March 1983, through some creative arrangements suggested by their accountants, Jiffy
Lube was able to obtain sufficient financing from Hindman's personal assets and current
shareholders. The company has survived and is by far the largest oil franchisor in the United
States. Jiffy Lube now faces another financial crisies.
The class session will involve meetings between teams of students representing Jiffy
Lube and a potential investor, Bridge Capital Investors (an investment partnership), and between
Jiffy Lube's accountants and Jiffy Lube. The purpose of the first meeting, between the
accountants and Jiffy Lube, will be to develop a financial strategy for Jiffy Lube and to develop
an understanding of what the accountants can do to help Jiffy Lube. The second meeting will be
to decide if a deal can be closed in which this partnership will invest in Jiffy Lube.
The actual negotiations can be held during the regular class session (fine if MBA's, 2
hour + class length) or on the outside on their own. See questions on page 528. Both ways have
worked well. A brief discussion of the case (1f 5-20 minutes) can be helpful to introduce the
exercise. The class will be divided into small groups representing BCI, the company, and the
accountants. Their main tasks are: a(1) prepare for the final meeting; (2b) develop a strategy and
plan; (3c) determine what they will agree on plus any other terms and conditions. Each meeting
will last approximately 20-30 minutes. Each team should select two members to take part in the
actual meetings. Recommend that each team spend approximately one hour to prepare for the
meeting after individual members have spent time on their own preparing the case.
Class Session
You may want to preface the team meetings with some or all of the following comments.
First, it is impossible to replicate the people or exactly how they would have behaved. There are
many ways to successfully conduct a meeting. Remember, our goal is to try out our own ideas
and learn as much as we can from doing and from observing each other in action. Second, be as
realistic as you possibly can in your role. Try to put yourself in the shoes of the person you are
representing.
Ask the two representatives from the Jiffy Lube team and the accountant’s team to meet
in the center of the class to start the meeting. It is helpful to use name cards to keep track of the
different teams. Remind the class of the purpose of the meeting: Jim Hindman and John Sasser
of Jiffy Lube are meeting with their accountants because they are facing another crises. By the
end of this meeting, they need to make some progress toward developing a financing strategy and
get a better understanding of what their options are.
Remind the team that the meetings are limited to 30 minutes, and that despite the time
constraints, their objective is to reach some type of closure by the end of the meeting. During the
meeting, you should provide any assistance needed to keep the discussion on track.
56 Chapter 15
19. When the meeting is over, ask representatives from the other two teams, Jiffy Lube and
Bridge Capital Investors, to come to the center of the class. Before starting, review the
background of the meeting: Bridge Capital Investors, an investor partnership, has proposed that
Jiffy Lube meet its current financing needs by selling Bridge Capital $10 million in unsecured
notes. Jiffy Lube must decide whether the deal is acceptable as is, whether it needs to be
modified, or whether Jiffy Lube will reject it and pursue another alternative. The objective of this
meeting is to determine if the deal can be closed.
After the meeting, begin the discussion session.
BRIDGE CAPTTAL INVESTORS
BRIDGE CAPITAL NEGOTIATING TEAM
INSTRUCTIONS AND TEAM ASSIGNMENTS FOR TEAMS REPRESENTING BRIDGE
CAPITAL INVESTORS
Your team will prepare for a 30 minute meeting with Jim Hindman end John Sasser
(CFO) from Jiffy Lube. Two members of your team should be selected to represent Don Remey
and another officer from Bridge Capital Investors, and take part in the meeting.
YOUR OBJECTIVE DURING THE MEETING IS TO DETERMINE WHETHER
YOUR INVESTMENT PARTNERSHIP, BRIDGE CAPITAL INVESTORS, WILL
COMPLETE AN AGREEMENT TO PROVIDE $10 MILLION IN FINANCING TO JIFFY
LUBE.
Background of Meeting
It is November 1985; Jiffy Lube has rapidly expanded over the last three years and now
has over 270 service centers in operation. Revenue and net income are projected to reach $30
million and $1.9 million respectively in fiscal 1986 (the third straight year of positive net
income). Jiffy Lube's growth (and survival) was made possible by creative financing obtained in
1983.
Your firm, Bridge Capital Investors, is a limited partnership specializing in later-stage
expansion financing of growing companies. Shearson Lehman Brothers referred Jiffy Lube to
you, the investment banking firm. You were one of the parties Shearson contacted in an attempt
to market a $10 million private placement for Jiffy Lube.
Don Remey describes the initial meetings with Hindman:
"On the surface, we didn't think that there was any way we were going to want to invest in
Jiffy Lube. The company was in a terrible financial position. It still intrigued us, though.
"What made the difference was meeting Jim Hindman. When you meet him, you know he
is good. I developed a great personal chemistry with him right away. Their business concept is
exciting and the timing is right. Talking to Jim makes me believe that he can pull it off.”
Preparation for the Meeting
To help prepare for the meeting you should have read the case material and address the
following questions:
1. Review the deal you have proposed for Jiffy Lube. How do the deal structure and
terms fit into your objectives as an investor? Be prepared to explain (end justify)
the terms to James Hindman and John Sasser.
Instructor’s Manual 57
20. 2. What are Jiffy Lube's capital requirements? How much cash do they need?
When? Is the $10 million deal sufficient for their needs?
3. How does the deal you proposed fit into Jiffy Lube's goal and long-term business
strategy? What are the implications for building a successful relationship between
Jiffy Lube and Bridge Capital?
4. Evaluate the other financing alternatives facing Jiffy Lube. What relative
bargaining position does the company have with regard to your proposal, and with
each of the other alternatives?
5. How will you handle the meeting and negotiations with Hindman and Sasser
tomorrow? What possible changes to the deal terms might they propose, and how
will you respond? (What changes are you willing to accept?)
Description of the Proposed Deal
The financing deal you have proposed to Jjiffy Lube is almost identical in the structure to
the other deals your firm has completed, and is composed of debt with an "equity kicker.” You
prefer to finance companies using this structure. One of your selling points for Jiffy Lube is the
speed at which you can complete the agreement due to its simplicity and your experience with
this type of financing.
Bridge Capital will not be providing the entire $10 million in financing if the deal is
concluded. As lead investor, you have assembled the following syndicate willing to invest under
the terms proposed:
Bridge Capital $4,000,000
Three Cities $2,500,000
Conn Mutual $2,000,000
Allied Capital $1,000,000
Investcorp $ 500,000
In addition to $10 million in unsecured notes, the financing deal you proposed includes
warrants allowing you to purchase 100m 100M of Jiffy Lube's common stock. The proposal also
includes a put provision (described in Exhibit 5, page 14 in the case materialG). Under the
provision, Jiffy Lube's stock must trade publicly at certain minimum prices by the end of 1990. If
the stock never reaches these minimum prices, you have the right to "put”' the warrants back to
Jiffy Lube.
The amount Jiffy Lube would be required to pay upon your put of the warrants is
described in the proposal as follows:
The price will be determined by the calculation of the amount necessary to result in a
300Mm internal rate of return to the Purchasers, taking into account all interest and principal
payments on the Notes.
The price will vary based upon certain actions that Jiffy Lube takes. You have calculated
the potential price under different scenarios, three of which are listed as follows:
Scenario Amount Payable by Jiffy Lube
Scenario If Warrants Are Put
No public offering, Notes are outstanding $ 17.1 million
for entire term
Public offering after 2 years, $5 million of $ 13.1 million
58 Chapter 15
21. Notes are prepaid
Entire $10 million of Notes are prepaid $ 9.1 million
after 2 years
(Details of these calculations are included on the attached pages.)
Under your proposal, if Jiffy Lube's stock never reaches the minimum levels, and
the company is unable to make the payment required under the put provision, Bridge Capital will
have the right to take over control of the board. In Don Remey's words, the put provision "makes
the entrepreneur bet on the future success of his company."
(Details of these calculations are included at the end of this chapter beginning on page
315.)
The Meeting
THE MEETING IS LIMITED TO 30 MINUTES
.
You are going into the meeting willing to conclude the deal you have proposed,
iff Jiffy Lube accepts your terms. If Hindman and Sasser request a different deal structure, you
will have to decide whether you are willing to negotiate modifications to the deal you have
proposed. But, you are also willing to walk away as you do have other deals on your plate.
BY THE END OF MTHE MEETING YOU WANT TO REACH A CONCLUSION
CONCERNING THE FINANCING DEAL YOU HAVE PROPOSED TO JIFFY LUBE.
Instructor’s Manual 59