I UAPL. For Questions 4 through 9, assume you are the manager of a venture capital fund, and a bank is offering to loan $20 million of the $55 million financing requirement. The after-tax cash outflows to service the bank debt are $5, $5, $5, $5, and $10 million in Years 1 through 5, respectively. You are considering providing an equity investment for the remaining $35 million required by AFC. 4. List three questions you might ask Dr. Aplin in your meeting with him. 5. You have decided to use the discounted cash flow approach to value AFC. Based on the riskiness of the new business you believe a 30 percent discount rate is appropriate. What is the forecasted value of the AFC to its equity holders? (Hint: Use the cash flows in Table 2 as a starting point.) TABLE 2 Selected Case Data In Thousands of Dollars $ 3,906 22,018 Liquidation Proceeds: Cash and marketable securities Accounts receivable Inventory Land and buildings Equipment Total proceeds 5,000 $57,253 Distribution of Proceeds Priority Claims: Claim $ 2,340 600 Payment $ 2,340 600 Percent of Claim Recelved 100.0% 100.0 Proceeds Remaining After Claim Is Pald $54,913 54,313 1. Mortgage 2. Trustee's fees 3. Wages due 4. Taxes due 5. Unfunded pension liability 5,000 6,000 5,000 6,000 100.0 100.0 46,982 40,982 . Initial General Creditor Allocation: General creditor claims. . $ 47,794 Proceeds remaining $ 40,982 Pro rata percentage 85.7% $23,834 85.7% 85.7. 85.7 N.A. 3,913 4,563 6. Accounts payable $ 19,998 $17,148 7. ST bank loans 5,000 4,287 8. Priority LT bank loans 3,913 9. Sub LT bank loans 0 10. Remaining mortgage General Creditor Allocation After Subordination Adjustment: 6. Accounts payable $ 19,998 $17,148 7. ST bank loans 18,233 15,634 8. Priority LT bank loans 5,000 5,000 X 9. Sub LT bank loans 3,200 10. Remaining mortgage $23,834 8,200 85.7% 85.7 100.0 X 3,200 : 0 N.A. Shareholders' Distribution: 11. Common stockholders.' $ $38,637 0 0.0%. $ 0 Table 1 Current Balance Sheet and New Capital Requirement Current Balance Sheet Capital Required for Venture (in Millions) Cash Patent $ 1.000 400.000 Purchase of Equipment Purchase of Land Construction Working capital Total Assets $401.000 Total requirement $ 1.000 Accounts Payable Loans from friends and relatives Tocal Liabilities Common Stock Additional pald-in capital 250.000 $251.000 149.900 Total Liabilities and Equities $401.000 $53 10 S129 65 * 168 10 1 Table 2 Projected Cash Flow Statements (in Millions) Yenel Year 2 Year 3 Year 4 Year 5 Sales $20 $117 Cost of goods sold 59 Gross margin $58 General/administrative expenses $ 64 Debt service requirements Pre-tax earnings $29 Taxes Net income 14 Depreciation/amortization $ 15 6 6 6 Terminal value 116 Net cash flow $ 21 S 23 $137 Notes: (a) Depreciation/amortization expense is included in the cost of goods sold, yet it is a noncash charge. Thus, it must be added back to net income to obtain the net cash flow in each year. (b) The terminal value is the present value, as of the end of Year 5, of the equity cash flows that are expected to occur after Year 5. This value was obtained by assuming 10 percent annual growth in equity cash flows after Year 5 and a cost of equity of 30 percent: $21(1.10) Terminal value =- - $116. 0.30 -0.10 I UAPL. For Questions 4 through 9, assume you are the manager of a venture capital fund, and a bank is offering to loan $20 million of the $55 million financing requirement. The after-tax cash outflows to service the bank debt are $5, $5, $5, $5, and $10 million in Years 1 through 5, respectively. You are considering providing an equity investment for the remaining $35 million required by AFC. 4. List three questions you might ask Dr. Aplin in your meeting with him. 5. You have decided to use the discounted cash flow approach to value AFC. Based on the riskiness of the new business you believe a 30 percent discount rate is appropriate. What is the forecasted value of the AFC to its equity holders? (Hint: Use the cash flows in Table 2 as a starting point.) TABLE 2 Selected Case Data In Thousands of Dollars $ 3,906 22,018 Liquidation Proceeds: Cash and marketable securities Accounts receivable Inventory Land and buildings Equipment Total proceeds 5,000 $57,253 Distribution of Proceeds Priority Claims: Claim $ 2,340 600 Payment $ 2,340 600 Percent of Claim Recelved 100.0% 100.0 Proceeds Remaining After Claim Is Pald $54,913 54,313 1. Mortgage 2. Trustee's fees 3. Wages due 4. Taxes due 5. Unfunded pension liability 5,000 6,000 5,000 6,000 100.0 100.0 46,982 40,982 . Initial General Creditor Allocation: General creditor claims. . $ 47,794 Proceeds remaining $ 40,982 Pro rata percentage 85.7% $23,834 85.7% 85.7. 85.7 N.A. 3,913 4,563 6. Accounts payable $ 19,998 $17,148 7. ST bank loans 5,000 4,287 8. Priority LT bank loans 3,913 9. Sub LT bank loans 0 10. Remaining mortgage General Creditor Allocation After Subordination Adjustment: 6. Accounts payable $ 19,998 $17,148 7. ST bank loans 18,233 15,634 8. Priority LT bank loans 5,000 5,000 X 9. Sub LT bank loans 3,200 10. Remaining mortgage $23,834 8,200 85.7% 85.7 100.0 X 3,200 : 0 N.A. Shareholders' Distribution: 11. Common stockholders.' $ $38,637 0 0.0%. $ 0 Table 1 Current Balance Sheet and New Capital Requirement Current Balance Sheet Capital Required for Venture (in Millions) Cash Patent $ 1.000 400.000 Purchase of Equipment Purchase of Land Construction Working capital Total Assets $401.000 Total requirement $ 1.000 Accounts Payable Loans from friends and relatives Tocal Liabilities Common Stock Additional pald-in capital 250.000 $251.000 149.900 Total Liabilities and Equities $401.000 $53 10 S129 65 * 168 10 1 Table 2 Projected Cash Flow Statements (in Millions) Yenel Year 2 Year 3 Year 4 Year 5 Sales $20 $117 Cost of goods sold 59 Gross margin $58 General/administrative expenses $ 64 Debt service requirements Pre-tax earnings $29 Taxes Net income 14 Depreciation/amortization $ 15 6 6 6 Terminal value 116 Net cash flow $ 21 S 23 $137 Notes: (a) Depreciation/amortization expense is included in the cost of goods sold, yet it is a noncash charge. Thus, it must be added back to net income to obtain the net cash flow in each year. (b) The terminal value is the present value, as of the end of Year 5, of the equity cash flows that are expected to occur after Year 5. This value was obtained by assuming 10 percent annual growth in equity cash flows after Year 5 and a cost of equity of 30 percent: $21(1.10) Terminal value =- - $116. 0.30 -0.10
