Arrow Precision Systems Inc (APS) is a privately owned defence contractor to the US military. APS is currently seeking venture funding to develop and test its advanced air-to-air missile system. Your fund, Defence Venture Partners, is presented with the funding proposal, summarised as follows. - APS requires $3 million of total equity funding in its next round of financing. - APS currently has revenue of $3 million, but because it is still in in its expansion phase, it has a negative earnings before interest, tax, depreciation and amortization is (EBITDA) of $560,000 - APS's current (pre-funding) balance sheet information is as follows: Total Assets =$5 million, Total Liabilities \ Debt =$2.6 million, and Equity =$2.4 million. You can assume the company has depleted its cash, so its cash balance is zero. - APS's current (pre-funding) number of shares is 200,000 shares As an investment analyst for Defence Venture Partners, you are asked to provide a fair valuation of APS shares using two methods, multiples and the NPV/DCF method: - Comparable firms: after extensive research, you manage to identify Eagle Advanced Targeting Inc (EAT), a NASDAQ listed firm and a US Navy air-to-air missile contractor, as the closest comparable. EAT's accounting information is as follows: Assets =$7 million, Liabilities \ Debt =$3 million, Equity =$4 million, Cash =$ 1 million, Revenue =$1.5 million, and EBITDA =$800,000. EAT currently has 1 million shares on issue. The stock is currently trading at \$15. Among many financial multiples, your fund prefers ONLY the following: (1) EV/ Revenue (2) EV/EBITDA. Also assume that your fund applies a standard liquidity discount factor of 25%. - NPV/DCF: an external investment advisor also places a value on the company; after extensive due diligence of $40 million. This-reflects the present value of all forecasted future CFs, incorporating all the required CAPEX and taking into account appropriate adjustments for bankruptcy and liquidity costs. 1. Using your fund's guidelines, calculate the enterprise value of APS using the comparables method? (2 marks) Please answer in millions of dollars, to two decimal places (e.g. for $20.549 million you should enter 20.55) 2. Given the enterprise value you calculated above what is the total percentage ownership that your fund will demand for providing APS with its required equity funding? (1 mark) Please answer to two decimal places (e.g. for 20.549% you should enter 20.55 ) 3. At what the share price will your fund invest? ( 0.5 mark) Please answer to two decimal places (e.g. for $20.549 you should enter 20.55) 4. How many new shares will be issued as a results of the investment? (1 mark) Please answer to the nearest share (e.g. for 20549.4 shares, you should enter 20549) 5. Now, using the enterprise value derived from the NPV method, calculate the the total percentage ownership that your fund will demand for providing APS with all of its equity funding requirements? ( 1 mark) Please answer to two decimal places (e.g. for 20.549% you should enter 20.55 ) 6. What is the share price at which your fund will invest under the NPV valuation? (0.5 mark)
