Instructions

Read through the case material to familiarize yourself with the details of the scenario

Estimate the cost of equity capital for the DCF valuation using the following assumptions:

Beta: average of the betas for Acme and Aruba

Market risk premium: 7.00% (this is an historical average)

Treasury bill rates:

Six month: 0.10%

One year: 0.20%

Three year: 0.80%

Five year: 1.50%

Conduct a valuation of the company and estimate the percentage of shares that the owners would need to offer venture capital investors in exchange for an investment of $30,000,000. Use the net cash flow forecasts provided in the case material and the following assumptions in your analysis:Discounted cash flow valuation

Weighted average cost of capital: cost of equity capital from above calculation

Horizon growth rate of 5.0%

Probability of success: 50%

Venture capital model valuation

EBITDA multiples: 9.90 (median value) and 9.40 (mean value)

Venture capital required rate of return of 50%

Liquidity discount of 30%

Comparable Company Valuation Data (dollars in milions) TEV/ Revenues, lYr Growth EBITDA Total Debt/Forward Forward Market Company Name (Ticker Acme Packet, Inc. (APKT) Aruba Networks, Inc. (ARUN) Aviat Networks, Inc. (AVNW) Cisco Systems (CSCO) Beta 1.50 1.95 1.35 1.20 Capitalization Revenue Margin % Capital % EBITDA P/E $2,244 $2,258 $108 $100,206 $295 $433 $463 $43,724 45.6% 48.2% 3.9% 4.7% 30.1% 3.0% 0.2% 25.3% 13.7x 13.3x 4.2x 6.4x 24.3x 31.5x 21.3x 10.3x 26.3% Summary Statistics Mean Median Notes: Valuation multiples are as of November 2011-The 10-year U. S Treasury rate was assumed to be 5% and the market risk premium 6.0% $26,204 $2,251 $11,229 $448 25.6% 25.2% 14.6% 14.1% 17.0% 17.0% 9.4x 9.9x 21.8x 22.8x 1.50 1.43