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[Venture Capital Valuation Method] A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of Year 5 when the net income is estimated at $1,600,000. A publicly traded competitor or "comparable firm" has current earnings of $1,000,000 and a market capitalization value of $10,000,000. A. Estimate the value of the new venture at the end of Year 5. Show your answer using both the direct comparison method and the direct capitalization method. What assumption are you making when using the current price-to-earning relationship for the comparable firm? B. Estimate the present value of the venture at the end of Year 0 if the venture capitalist wants a 40 percent annual rate of return on the investment. [Multiple Financing Rounds] Ratchets.com anticipates that it will need $15 million in venture capital to achieve a terminal value of $300 million in five years. A. Assuming it is a seed-stage firm with no existing investors, what annualized return is embedded in its anticipation? B. Suppose the founder wants to have a venture investor inject $15 million in three rounds of $5 million at times 0,1 , and 2 with a time 5 exit value of $300 million. If the founder anticipates returns of 70 percent, 50 percent, and 30 percent for rounds 1,2 , and 3 , respectively, what percentage of ownership is sold during the first round? During the second round? During the third round? What is the founder's Year 5 ownership percentage? C. Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1,2 , and 3 (at times 0,1 , and 2)? D. What is the second-round share price derived from the answers in Parts B and C? [Venture Capital Valuation Method] A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of Year 5 when the net income is estimated at $1,600,000. A publicly traded competitor or "comparable firm" has current earnings of $1,000,000 and a market capitalization value of $10,000,000. A. Estimate the value of the new venture at the end of Year 5. Show your answer using both the direct comparison method and the direct capitalization method. What assumption are you making when using the current price-to-earning relationship for the comparable firm? B. Estimate the present value of the venture at the end of Year 0 if the venture capitalist wants a 40 percent annual rate of return on the investment. [Multiple Financing Rounds] Ratchets.com anticipates that it will need $15 million in venture capital to achieve a terminal value of $300 million in five years. A. Assuming it is a seed-stage firm with no existing investors, what annualized return is embedded in its anticipation? B. Suppose the founder wants to have a venture investor inject $15 million in three rounds of $5 million at times 0,1 , and 2 with a time 5 exit value of $300 million. If the founder anticipates returns of 70 percent, 50 percent, and 30 percent for rounds 1,2 , and 3 , respectively, what percentage of ownership is sold during the first round? During the second round? During the third round? What is the founder's Year 5 ownership percentage? C. Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1,2 , and 3 (at times 0,1 , and 2)? D. What is the second-round share price derived from the answers in Parts B and C

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