1. Richard Mille owner of The Mille Coffee, wants to determine the present value of his investment. The Mille Coffee 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 = $3 million, and Year 5 = $3.5 million. Cash inflows are expected to be $4.2 million in Year 6 and are expected to grow at a 6 percent annual rate thereafter. Richard believes that his potential investor should expect to make about 40 percent on a five-year investment. As ventures move from their late rapid-growth stages and into their maturity stages, a 15 percent discount rate is often used.

a) Determine The Mille Coffees terminal or horizon value at the end of five years?

b) What is the present value of The Mille Coffee?

c) What percent ownership interest should Richard Mille be willing to give today to a venture investor, Jane Tiguan, for her $2 million investment?

2. Edinson Moraes owner of Moraes Restaurant anticipates that it will need $10 million in venture capital to achieve a terminal value of $200 million in five years

a) Suppose the founder wants to have a venture investor inject $10 million in two rounds of $5 million at times 0 and 1 with a time 5 exit value of $200 million. If the founder anticipates returns of 50 percent and 30 percent for rounds 1 and 2, respectively, what percentage of ownership is sold during the first round? During the second round? What is the founders Year 5 ownership percentage?

b) Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1 and 2 (at times 0 and 1)?

c) What is the first-round and second-round share price derived from the answers in part A and B?