Cybercode is a cyber-software company in early development. The firm has already built its first prototype and secured a number of government contacts that are slowly paying off. However, a significant new investment is required to expand the product to penetrate private markets. In particular, the firm is developing a novel approach to encrypting financial data flows and plan to start selling the new software to banks and insurance companies starting in 2015.

a. Calculate sales growth, a change in net operating assets and asset intensity of Cybercode in 2014.

b. Assume that the asset intensity will remain constant at the level of 2014, build a projection of free cash flow for Cybercode under the following assumptions:

i. Assume that sales growth in 2015-2019 will remain the same as in 2014 and becomes constant in 2020 at the rate of 5% forever.

ii. Assume that the asset intensity will remain constant at the level of 2014.

iii. Assume that in 2015 and later net income turns to positive due to reduced development costs and is equal to 20% of sales.

c. Apply DCF to calculate the valuation for the venture at the end of 2013 if the discount rate is 15%.

d. If investors and founders agree on the valuation from part c, what ownership would they seek to give a company $20M?

B I U Paste Format Painter Alic Clipboard E13 2013 2014 1Thousands of dollars 7567 S 9,876 Subscription Sales 1801S200 S 7,747 10,076 8 Costs of Goods Sold-Support S s (1,560) S (1,591) (2,010) S (2,241) s 5,737 S 7,835 4 Support Services - 6 Total Sales 9 Costs of Goods Sold - Devices (450) S(650) 10 11 Totals Costs 12 13 Gross Margin 14 15 Operating Expenses 16 Research and Development 17 Sales and Marketing S (2,100) S S (3,750) S (4,639) S(891) S (1890) (2,589) 18 G&A 19 20 Total Operating Expenses S (6,741) S (9,118) 21 22 Operating Income 23 24 Taxes 25 26 Net income S (1,004) S (1,283) S(527) $(687) $ (1531) S (1.970) Balance Sheet income Statement type here to search AutoSave leHome Insert Draw Page Layout Formulas Data Review Vie Wrap Te Calibri Format Painter 8 I U Clipboard aste Alignment Font 2013 2014 Thousands of dollars $11,870 $12,160 5,240 8,932 Cash and Equivalents Receivables Total Current Assets $ 17,110 $21,092 Property and Equipment $ 460 $ 955 $ 1,081 1,236 Other Assets tTotal Assets $18,651 $23,283 3 Account Payable 4 Accrued Liabilities 15 Deffered Revenue $ 469 $ 780 $ 3,670 $ 5,489 S 640 S 961 17 Total Liabilities 181 19 Total Equity 20 21 Total Liabilities and Equity s 4,779 $ 7,230 $ 13,872 $16,053 s 18,651 $23.283 Balance Shet ncome Statement Type hre to search B I U Paste Format Painter Alic Clipboard E13 2013 2014 1Thousands of dollars 7567 S 9,876 Subscription Sales 1801S200 S 7,747 10,076 8 Costs of Goods Sold-Support S s (1,560) S (1,591) (2,010) S (2,241) s 5,737 S 7,835 4 Support Services - 6 Total Sales 9 Costs of Goods Sold - Devices (450) S(650) 10 11 Totals Costs 12 13 Gross Margin 14 15 Operating Expenses 16 Research and Development 17 Sales and Marketing S (2,100) S S (3,750) S (4,639) S(891) S (1890) (2,589) 18 G&A 19 20 Total Operating Expenses S (6,741) S (9,118) 21 22 Operating Income 23 24 Taxes 25 26 Net income S (1,004) S (1,283) S(527) $(687) $ (1531) S (1.970) Balance Sheet income Statement type here to search AutoSave leHome Insert Draw Page Layout Formulas Data Review Vie Wrap Te Calibri Format Painter 8 I U Clipboard aste Alignment Font 2013 2014 Thousands of dollars $11,870 $12,160 5,240 8,932 Cash and Equivalents Receivables Total Current Assets $ 17,110 $21,092 Property and Equipment $ 460 $ 955 $ 1,081 1,236 Other Assets tTotal Assets $18,651 $23,283 3 Account Payable 4 Accrued Liabilities 15 Deffered Revenue $ 469 $ 780 $ 3,670 $ 5,489 S 640 S 961 17 Total Liabilities 181 19 Total Equity 20 21 Total Liabilities and Equity s 4,779 $ 7,230 $ 13,872 $16,053 s 18,651 $23.283 Balance Shet ncome Statement Type hre to search