B. Jim Jacobs is negotiating w

B. Jim Jacobs is negotiating with a Venture Capital Fund (VCF) for $ 3 MIL financing for his new venture. Jim is the sole founder and owns 100% of the company’s equity. He is adamant that he must keep a 51% interest in the company after external capital is raised. The VCF believes a 5X return in NLT 5 years is an appropriate return for the risk associated with this investment.

The company has just begun generating revenue, and it does not expect to generate positive Cash Flow (CF) until Year 3. Discreet Cash Flow projections prepared from pro forma financial statements are presented below. After the discreet forecasting period (Yr 4), Rick and the VCF expect CFs to grow by 3.5% per year in perpetuity.

Year Cash Flow

1 $ -1,800,000

2 $ -1,000,000

3 $ 4,750,000

4 $ 8,000,000

  1. What imputed rate of return is being demanded by the investor? (1)

  1. Given the required rate of return calculated in A. above, what value would the VCF give to projected Discreet Period pro forma Cash Flows? (1)

  1. To satisfy Jim’s desire to retain controlling (51%) interest in the venture, how much must he convince the VCF that the company is worth TODAY? (1)

  1. To support that estimated current value, and given the Discreet Period CF valuation above, what PRESENT VALUE is being attributed to Terminal Period Cash Flows? (1)

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