# Entrepreneurial Finance Week 4

Paper, Order, or Assignment Requirements

Show all work/calculations in most simplest for no excel please

Web-surfing exercise: Find a fast-growth publicly traded firm with financial statements posted on the firm’s Web page. Relate that firm’s financial statements to those of the examples in this chapter.
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Formulate the process by which you would project that firm’s financial statements into the future in order to conduct a valuation.
2. Using a free stock quoting and research site on the Web (e.g., http://www.bloomberg.com or http://money.cnn.com), examine the current price for an Internet company. Relate the financial data you can find on the firm to the current stock price.

Chapter 9: Exercises/Problems: # 2 p. 344
2.
[Venture Present Values] The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:
A. Assume annual cash flows are expected to remain at the \$800,000 level after Year 5 (i.e., Year 6 and thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the venture’s present value.
B. Now assume that the Year 6 cash flows are forecasted to be \$900,000 in the stepping-stone year and are expected to grow at an 8 percent compound annual rate thereafter. Assuming that the investors still want a 40 percent rate of return on their investment, calculate the venture’s present value.
C. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the venture’s present value.
D. Let’s assume that TecOne investors have valued the venture as requested in Part C. An outside investor wants to invest \$3 million in TecOne now (at the end of Year 0). What percentage of ownership in the venture should the TecOne investors give up to the outside investor for a \$3 million new investment?

Chapter 9: Softec Mini Case: p. 348 A- F only

MINI CASE: SoftTec Products company
The SoftTec Products Company is a successful, small, rapidly growing, closely held corporation. The equity owners are considering selling the firm to an outside buyer and want to estimate the value of the firm. Following is last year’s income statement (2010) and projected income statements for the next four years (2011–2014). Sales are expected to grow at an annual 7 percent rate beginning in 2015 and continuing thereafter.
ACTUAL
PROJECTED

[\$ THOUSANDS] 2010 2011 2012 2013 2014
Net sales \$150.0 \$200.0 \$250.0 \$300.0 \$350.0
Cost of goods sold −75.0 −100.0 −125.0 −150.0 −175.0
Gross profit 75.0 100.0 125.0 150.0 175.0
SG&A expenses −30.0 −40.0 −50.0 −60.0 −70.0
Depreciation −7.5 −10.0 −12.5 −15.0 −17.5
Earnings before interest and taxes 37.5 50.0 62.5 75.0 87.5
Interest −3.5 −3.5 −3.5 −3.5 −3.5
Earnings before taxes 34.0 46.5 59.0 71.5 84.0
Taxes (40% rate) −13.6 −18.6 −23.6 728.6 −33.6
Net income \$ 20.4 \$ 27.9 \$ 35.4 \$ 42.9 \$ 50.4
Selected balance sheet accounts at the end of 2010 were as follows. Net fixed assets were \$50,000. The sum of the required cash, accounts receivable, and inventories accounts was \$50,000. Accounts payable and accruals totaled \$25,000. Each of these balance sheet accounts was expected to grow with sales over time. No changes in interest-bearing debt were projected, and there were no plans to issue additional shares of common stock. There are currently 10,000 shares of common stock outstanding.
Data have been gathered for a comparable publicly traded firm in the same industry that Soft-Tec operates in. The cost of common equity for this other firm, Wakefield Products, was estimated to be 25 percent. SoftTec has survived for a period of years. Management is not currently contemplating a major financial structure change and believes a single discount rate is appropriate for discounting all cash flows.
A. Project SoftTec’s income statement for 2015.
B. Determine the annual increases in required net working capital and capital expenditures (CAPEX) for SoftTec for the years 2011 to 2015.
C. Project annual operating free cash flows for the years 2011 to 2015.
D. Estimate SoftTec’s terminal value cash flow at the end of 2014.
E. Estimate SoftTec’s equity value in dollars and per share at the end of 2010.
F. SoftTec’s management was wondering what the firm’s equity value (dollar amount and on a per-share basis) would be if the cost of equity capital were only 20 percent. Recalculate the firm’s value using this lower discount rate.
G. Now assume that the \$35,000 in long-term debt (and therefore interest expense at 10 percent) is expected to grow with sales. Recalculate the equity using the original 25 percent discount rateGo