The Valuation is P/E = Market Valuation per share / Earnings Per Share(EPS) where EPS = Net Inc./# of shares. For example, a company has $40,000 in net earnings and a market capitalization of 500,000, then P/E = 500,000/40,000 = 12.5

Base on the above and class discussion answer A & B below re the following simulation:

.A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of year 5 when the net income is estimated to be $1,600,000. A publicly-traded competitor or comparable firm has current earnings of $1,000,000 and a market capitalization value of $10,000,000. Assumptions

1. The comparable firm is really comparable to the new venture.

2. The current price-to-earnings relationship of 10 will still be the appropriate multiple to use 5 years from now.

A. Estimate the value of the new venture at the end of year 5 using the P/E ratio

B. Estimate the present value of the venture at the end of year 0 assuming the venture capitalist is looking for a 40 percent annual rate of return on the investment.