Southwest Ventures is considering an investment in a Bangalore$-$based startup firm called Creed

and Company. Creed and Company is involved in organic gardening and has developed a complete

line of organic products for sale to the public that ranges from composted soils to organic pesticides.

The company has been around for almost twenty years and has developed a very good reputation in

the Bangalore business community, as well as with the many organic gardeners who live in the area.

Last year, Creed generated earnings before interest, taxes, and depreciation $($EBITDA$)$ of $$4$

million. The company needs to raise $$5\mathrm{.}8$ million to finance the organic expansion of Creed and the

acquisition of a similar company called Organic and More that operates in both the Hyderabad and

Delhi markets. The acquisition would make it possible for Creed to market its private$-$label products

to a much broader customer base in the major metropolitan areas of India. Moreover, Organic and

More carned EBTTDA of $$1$ million in $2023.$ The owners of Creed view the acquisition and its funding

as a critical element of their business strategy, but they are concerned about how much of the company

they will have to give up to a venture capitalist in order to raise the needed funds.

Creed hired an experienced financial consultant, whom they trust, to evaluate the prospects of

raising the needed funds. The consultant estimated that the company would be valued at a multiple of

five times EBITDA in five years and that Creed would grow the combined EBITDAs of the two

companies at a rate of $20\%$ per year over the next five years. Neither Creed nor its acquisition target,

Organic and More, uses debt financing at present. However, the VC has offered to provide the

acquisition financing in the form of convertible debt that pays interest at a rate of $8\%$ per year and is

due and payable in five years.

$4\mathrm{.}1.[5$ marks$]$ What enterprise value do you estimate for Creed $($including the planned acquisition$)$

in five years?

$4\mathrm{.}2.[5$ marks$]$ If the VC offers to finance the needed funds using convertible debt that pays $8\%$ per

year and converts to a share of the company sufficient to provide a $25\%$ rate of return on his investment

over the next five years, how much of the firm's equity will he demand?

$4\mathrm{.}3.[5$ marks$]$ What fraction of the ownership in Creed would the venture capitalist require if Creed

is able to grow its EBITDA by $30\%$ per year $($all else remaining the same$)$ and the VC still requires a

$25\%$ rate of return over the next five years?