Chapter 9
1. [Present Value Valuation Concepts] Assume you sell for $100,000 a 10 percent ownership stake in
a future payment one year from now of $1.5 million.
A. What are you saying about the implied return for the 10 percent owner?
B. What is the present value of the entire $1.5 million, using the implied return from Part A?
C. What is 10 percent of the value determined in Part B?
D. Does it matter whether you grow the $100,000 at 50 percent to $150,000 and note it is 10 percent
of $1.5 million, or discount the $1.5 million at 50 percent to get $1 million and note that $100,000 is
10 percent of this present value?
2. Ben Toucan, owner of the Aspen Restaurant, wants to determine the present value of his
investment. The Aspen Restaurant is currently in the development stage but Toucan hopes to “begin”
operations early next year. After-tax cash flows during the next five years are expected to be as
follows: Year 1 = 0, Year 2 = 0, Year 3 = 0, Year 4 = $2.5 million, and Year 5 = $3 million. Cash inflows
are expected to be $3.18 million in Year 6 and are expected to grow at a 6 percent annual rate
thereafter. Recall from Chapter 7 that venture investors often use different discount rates when
valuing ventures at various stages of their life cycles. For example, target discount rates by life cycle
stage are: development stage, 50 percent; startup stage, 40 percent; survival stage, 35 percent; and
early rapid-growth stage, 30 percent. As ventures move from their late rapid-growth stages and into
their maturity stages, a 20 percent discount rate is often used.
A. Determine the Aspen Restaurant’s terminal or horizon value at the end of five years, assuming the
venture will be entering its maturity stage.
B. What is the present value of the Aspen Restaurant, assuming that it is a development-stage
venture?
C. What percent ownership interest should Ben Toucan be willing to give today to a venture investor,
Sherri Isitar, for her $1 million investment?
D. Let’s assume that the Aspen Restaurant was started early last year and, thus, is in its startup stage
and has the same future cash flow expectations as indicated earlier. Using a typical startup-stage
required rate of return or discount rate, calculate the present value of the Aspen Restaurant.
E. Owning a restaurant is often considered to be a risky investment, in that restaurants often are
continuously moving into and out of their survival stages. Assume that a typical survival-stage
required rate of return is applied to all future cash flows estimated for the Aspen Restaurant.
Calculate the venture’s present value.
3. Following are financial statements (historical and forecasted) for the Global Products Corporation.
A. Assume that the cash account includes only required cash. Determine the dollar amount of equity
valuation cash flow for 2011.
B. Now assume that Global Products’ required cash is set at 3 percent of sales. Any additional cash
would be surplus cash. Re-estimate the dollar amount of equity valuation cash flow for 2011.
C. Let’s assume that investors in Global Products want to estimate the venture’s present value at the
end of 2010. Forecasted financial statements reflect the stepping-stone year. Cash flows are expected
to grow at a perpetual 8 percent annual rate beginning in 2012. Assume that all cash is required cash
as was done in Part A. What is Global Products’ present value if investors want an annual rate of
return of 25 percent?
D. Work with the assumptions in Part B about Global Products’ required cash being 3 percent of
sales. Calculate the present value of the Global Products venture at the end of 2010 if investors want
an annual rate of return of 25 percent and cash flows are expected to grow at a perpetual 8 percent
annual rate beginning in 2012.
