ppt
Valuation
Questions that must be addressed
Who are the equity holders, and share?
What is the current value of the firm
What actions will you take to improve the firm’s valuation significantly
How much additional investment do you seek?
Estimate the outcome of this investment: the valuation in 2 years
Equity holders
| Executive Team | 40,000 |
| Loan shark | 31,288 |
| Venture Capitalists | 50,000 |
Book Value = $ 12,128,800
Number of Shares Outstanding: 121,288 shares
Ownership Share
Total
Executive Team Loan shark Venture Capitalists 40000 31288 50000
Estimate Current Value – Use the Balance Scorecard
| Total Performance * | 0.102 | 30.067 | 11.150 | 0.102 |
| Financial Performance * | 10.930 | 77.077 | 36.837 | 10.930 |
| Market Performance * | 0.120 | 0.361 | 0.218 | 0.120 |
| Marketing Effectiveness | 0.598 | 0.735 | 0.664 | 0.618 |
| Investment in Future * | 2.728 | 3.458 | 3.215 | 3.450 |
| Wealth | 0.157 | 0.623 | 0.361 | 0.157 |
| Human Resource Management | 0.821 | 0.921 | 0.888 | 0.821 |
| Asset Management * | 0.763 | 4.947 | 2.398 | 1.071 |
| Manufacturing Productivity | 0.238 | 0.563 | 0.371 | 0.348 |
| Financial Risk * | 0.760 | 1.000 | 0.917 | 0.760 |
Consider the six * items in the balance scorecard. If all of them are red or brown, then the company has negligible value
If half of items are red and brown, then the value is downgraded to 20 - 50% from the book value
If three of the items are red /brown and rest are green, no down grade in valuation is necessary
Minimum Maximum Average Company A
Another Example
| Indicator | Minimum | Maximum | Average | Company B |
| Total Performance | 0.102 | 30.067 | 11.150 | 30.067 |
| Financial Performance | 10.930 | 77.077 | 36.837 | 77.077 |
| Market Performance | 0.120 | 0.361 | 0.218 | 0.361 |
| Marketing Effectiveness | 0.598 | 0.735 | 0.664 | 0.735 |
| Investment in Future | 2.728 | 3.458 | 3.215 | 2.728 |
| Wealth | 0.157 | 0.623 | 0.361 | 0.623 |
| Human Resource Management | 0.821 | 0.921 | 0.888 | 0.921 |
| Asset Management | 0.763 | 4.947 | 2.398 | 2.809 |
| Manufacturing Productivity | 0.238 | 0.563 | 0.371 | 0.335 |
| Financial Risk | 0.760 | 1.000 | 0.917 | 1.000 |
Consider a valuation about price per share greater than book price of $100 a share
What actions will you take to improve the firm’s valuation significantly
Manufacturing Capacity?
New R&D?
New brands?
New sales channels?
Productivity Investment?
How much new investment will you ask for?
VC: What revenue and profitability can you expect?
If you project revenue, use gross margin ratios and net income ratio to project gross margin and net profits, for the next eight quarters
Ratio of 50% gross margin and 15+% net profits, is reasonable in later quarters, if you do not have positive net income in Quarter 9
Definitions EPS and P/E Ratio
Earnings per share = Total Net Income / number of shares outstanding
If net income is $3.5 million and shares outstanding is 120,000, then EPS = $3.5 million / 120,000 = $29
Current Price/Earnings per share = Current Price /EPS.
If current price of a share is $100, then current Price /EPS = $100/$29 = 3
Definitions Forward EPS and Forward P/E ratio
Assume earnings to grow by 25% annually.
At the end of 1 year, net income is estimated $4.6 million
At the end of 2nd year, net income is $6.5 million
To do this assume you issued 50,000 in new shares.
Total shares outstanding: 170,000
Forward Earnings per share = Net Income in year 2 / number of shares outstanding = $6.5 million / 170,000 = 38
Expect Price/Earnings per share to rise to 8
Then, Forward Price = Forward Earnings per share* 8 = 38 * 8 = $306
Projected Return to VC = ($ 306 per share - $ 100 per share)/$100 = 200% over 2 years.