Once Grant has established a value for perspective. Of course, investors will be an investment. They will also want to determine how much of the firms shares they need to acquire to command that return. Grant expects that early-stage investors will want to earn a return of 30% to compensate for the risk. The rate of return reflects the investors perceptions of the economic, industry, and company-specific risk factors. It also accounts for the alternative investments available. Grant thinks that 30% will be adequate compensation for the risks associated with investing in a new, untried venture like New Techs growth plan. Grant explains that investors will evaluate the percentage of shares they require by looking at the potential return at exit, i.e., at the end of the investment period. This exit might be achieved through an IPO, a sale of the whole company, a buyback or redemption of the investors shares, or other means. The investor will be getting a percentage of the value of New Techs shares at the exit and will want to be sure that the percentage is high enough for them to hit their rate of return target of 30%. Grants initial assessment is that New Tech will fall short of an expected 30% after-tax return on investment for its investors. If that is so, they will need to alter their offering somehow to accommodate investor demands, possibly the percentage of shares they will offer. But first he explains how the calculations are done.

Grant starts with the assumption that potential investors would likely want to exit around 2017. 1. Assuming that the investors own 30% of New Techs shares at the time of exit and that the 2017 value would be three times the 2017 EBITDA, what would be the value of the firm in 2017? 2. What would be the investors share of the 2017 value?

3. What would be the return on a $1 million investment in the company today at that valuation?

4. Is your calculated return adequate? If not, how can it be made acceptable to investors?

Valuation: Survey of Methods 165 Table 5.8 New Tech's Financial Forecast ($,000s) 2012 Actual 2013 Forecast 2014 2015 2016 2017 3,000 1,185 1,815 3,900 1,560 2,340 4,700 5,640 6,700 8,040 1,645 1,805 2,077 2,412 3,055 3,835 4,623 5,628 Sales Cost of goods Sold' Gross margin Operating expenses Selling expense Administrative expenses Total operating costs Operating income Taxes (34%) Net income Working capital Accounts receivable Inventory Accounts payable Net working capital Capital spending 'COGS includes depreciation of the amounts to the right 857 555 1,412 403 109 294 1,326 702 2,028 312 106 206 1,316 1,410 1,474 1,528 752 846 1,005 1,206 2,068 2,256 2,479 2,734 987 1,579 2,144 2,894 336 537 $729 984 651 1,042 $1,415 1,910 450 350 550 250 546 429 585 390 1,100 325 $658 $470 $658 470 740 375 733 564 620 677 500 400 871 1,045 670 804 737 884 804 965 500 500 430 490 To Do Calculate the value of New Tech today, using the data given in Table 5.8 and the preceding assumptions. Valuation: Survey of Methods 165 Table 5.8 New Tech's Financial Forecast ($,000s) 2012 Actual 2013 Forecast 2014 2015 2016 2017 3,000 1,185 1,815 3,900 1,560 2,340 4,700 5,640 6,700 8,040 1,645 1,805 2,077 2,412 3,055 3,835 4,623 5,628 Sales Cost of goods Sold' Gross margin Operating expenses Selling expense Administrative expenses Total operating costs Operating income Taxes (34%) Net income Working capital Accounts receivable Inventory Accounts payable Net working capital Capital spending 'COGS includes depreciation of the amounts to the right 857 555 1,412 403 109 294 1,326 702 2,028 312 106 206 1,316 1,410 1,474 1,528 752 846 1,005 1,206 2,068 2,256 2,479 2,734 987 1,579 2,144 2,894 336 537 $729 984 651 1,042 $1,415 1,910 450 350 550 250 546 429 585 390 1,100 325 $658 $470 $658 470 740 375 733 564 620 677 500 400 871 1,045 670 804 737 884 804 965 500 500 430 490 To Do Calculate the value of New Tech today, using the data given in Table 5.8 and the preceding assumptions