Southwest Ventures is an entrepreneurial firm that manufactures RFID chips for supermarkets. You have been hired by the CEO of Southwest Ventures to determine if he should take an offer of investment of $0.5million from a VC investor in return for a 35% equity stake. Your first task is to value the company. You have already drawn the pro forma financial statements for the company Exhibit 1). Since this is a new company you decide to look at the RFID manufacturing industry and find comparable companies. After extensive research you shortlist 3 companies: 1) North Ventures 2) West Ventures 3) East Ventures You compile salient data about financials as shown in the Exhibit 1. Southwest Ventures Income statement is projected for next year and is considered as representative for current exercise. Competitor's financials are the latest available. You can assume that next year's pro forma income statement of Southwest is representative. Exhibit 1:1 Pro Forma Income Southwest As % of Ventures sales North Ventures Income Statements of Competitors Latest FY As % of West As % of East sales Ventures sales Ventures As % of sales Net sales Cost of goods sold 1,055.000 220 150 5,320,000 3,530,000 52.000.000 33,000,000 2.900.000 1,809,000 73% 66% 62% Gross profit 284 850 27% 1.790,000 34% 19,000,000 37% 1.091.000 38% 16% 24% Operating expenses Interest expense 170,000 0 1,090,000 142,000 20% 3% 12,500,000 2,000,000 810,000 800.000 28% 28% Profit (loss) before taxes Tax (21%) 114,850 24,119 11% 256 - 18% 558,000 117,180 10% 2% 4,500,000 945000 -519.000 -108.990 79 Net Profit - Net Income 30,732 440,820 8% 3,555.000 -410010 10.2 432 11 34 Latest Share Price(s) Shares Outstanding in millions) Debtm from balance sheet Cash (5m from balance sheet) 1.20 0.40 57,20 5.30 230 002 Part A) Value Southwest Ventures using EV/E (enterprise value/earnings) and EV/Sales multiples. Part B) Based only on your valuation model, will you recommend to accept or reject the VC offer? Part C) What other considerations apart from valuation model can influence your recommendation? Southwest Ventures is an entrepreneurial firm that manufactures RFID chips for supermarkets. You have been hired by the CEO of Southwest Ventures to determine if he should take an offer of investment of $0.5million from a VC investor in return for a 35% equity stake. Your first task is to value the company. You have already drawn the pro forma financial statements for the company Exhibit 1). Since this is a new company you decide to look at the RFID manufacturing industry and find comparable companies. After extensive research you shortlist 3 companies: 1) North Ventures 2) West Ventures 3) East Ventures You compile salient data about financials as shown in the Exhibit 1. Southwest Ventures Income statement is projected for next year and is considered as representative for current exercise. Competitor's financials are the latest available. You can assume that next year's pro forma income statement of Southwest is representative. Exhibit 1:1 Pro Forma Income Southwest As % of Ventures sales North Ventures Income Statements of Competitors Latest FY As % of West As % of East sales Ventures sales Ventures As % of sales Net sales Cost of goods sold 1,055.000 220 150 5,320,000 3,530,000 52.000.000 33,000,000 2.900.000 1,809,000 73% 66% 62% Gross profit 284 850 27% 1.790,000 34% 19,000,000 37% 1.091.000 38% 16% 24% Operating expenses Interest expense 170,000 0 1,090,000 142,000 20% 3% 12,500,000 2,000,000 810,000 800.000 28% 28% Profit (loss) before taxes Tax (21%) 114,850 24,119 11% 256 - 18% 558,000 117,180 10% 2% 4,500,000 945000 -519.000 -108.990 79 Net Profit - Net Income 30,732 440,820 8% 3,555.000 -410010 10.2 432 11 34 Latest Share Price(s) Shares Outstanding in millions) Debtm from balance sheet Cash (5m from balance sheet) 1.20 0.40 57,20 5.30 230 002 Part A) Value Southwest Ventures using EV/E (enterprise value/earnings) and EV/Sales multiples. Part B) Based only on your valuation model, will you recommend to accept or reject the VC offer? Part C) What other considerations apart from valuation model can influence your recommendation