5. [Venture Present Value Concepts] Refer to the FrothySlope microbrewery example at the beginning of this chapter.
A. How does the $500,00 piece of the terminal value relate to the future value of the $100,00? That is, the brewpub investor was looking for a 40 percent return. The five-year future value of $100,00 growing at 40 percent is 100,000 × (1.4)5 = $537,82, slightly more than $500,00. Does this mean the investor is not really expected to make 40 percent on the $100,000, even though we used that discount rate to arrive at the initial $5,856,93 valuation? (Hint: What about explicit forecast period flows?)
B. Returning to the brewpub spreadsheet with all flows included, how much more of the venture’s ownership of surplus cash flows would have to be sold for the $100,00 if the investor expected to make 70 percent (given Jim’s utopian vision of his future)?
C. What percentage of the brewpub’s present value is contained in the present value of the terminal value (the venture’s reversion value)?
D. How much ownership of the brewpub cash flows would need to be sold to an investor demanding 40 percent but agreeing that the mature brewpub venture would terminally grow at a rate of 8 percent with a risk profile requiring a discount rate of 16 percent? What if the terminal growth rate were 10 percent and the discount rate 18 percent?