1. You are evaluating making an investment in a startup company that is developing a new electronic product. The company is planning on an aggressive development and rollout of the product, and is planning on spending $10 million in R&D, $5 million in G&A expenses, and $10 million in capital expenditures before realizing any sales. You prepare a set of five year projections in order to forecast the performance and cash needs of the business. Your forecast before any financing raised is set forth below (for simplicity, I ignored tax loss carry-forwards). Answer the questions that follow.

1. In what year does the company become profitable?

2. In what year does the company generate annual positive free cash flow?

3. Based on the forecast, what is the minimum total amount of financing that you think the company would need to raise in order to achieve its plan (round up to the nearest $5 million). Feel free to add any commentary to your answer.

4.What is the value of the business after 5 years based on the $36,581 of free cash flow in year 6 if the appropriate discount rate (WACC) is 12% and the constant growth rate in free cash flow is 4% per year in perpetuity? (Use the constant growth perpetuity model and ignore cash and debt)

5.Based on the valuation above, and assuming that you invest all of the required capital that you estimate to be required at year zero, if you require a 35% rate of return on your investment over five years, then how much of the company do you need to own to achieve your desired return? (ignore cash and debt) (Answer in percent)

(in thousands, except per unit) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Income Statement Units Sold Price Per Unit 1000 50.00 $ 3000 50.00 5000 50.00 6000 55.00 $ 7000 60.00 $ 7280 61.20 $ $ $ 60% Total Revenues COGS R&D S, G&A Pretax Income Taxes Net Income 10,000 5,000 (15,000) $ 50,000 $ 150,000 $ 250,000 30,000 90,000 150,000 15,000 18,000 20,000 15,000 45,000 65,000 (10,000) (3,000) 15,000 3,750 (10,000) (3,000) 11,250 $ 330,000 198,000 23,000 70,000 39,000 9,750 29,250 $ 420,000 $ 445,536 252,000 267,322 25,000 26,520 90,000 95,000 53,000 56,694 13,250 14,174 39,750 42,521 25% (15,000) 10,000 5,500 Capital Expenditures Depreciation 2,000 1,250 2,500 1,344 4,000 1,488 5,000 1,802 6,000 2,614 2,202 (25,000) Balance Sheet Cash Net Working Capital PP&E Total Net Assets 10% (40,750) 5,000 10,750 (25,000) 10,000 (15,000) (54,906) 15,000 11,906 (28,000) (56,168) 25,000 14,418 (16,750) (38,116) 33,000 17,616 12,500 (10,664) 42,000 20,914 52,250 25.918 44,554 24,300 94,771 Net Worth (15,000) (25,000) (28,000) (16,750) 12,500 52,250 94,771 Cash Flow (15,000) Net Income Depreciation Change in Net Working Capital Funds from Operations (10,000) 1,250 (5,000) (13,750) (3,000) 1,344 (10,000) (11,656) 11,250 1,488 (10,000) 2,738 29,250 1,802 (8,000) 23,052 39,750 2,202 (9,000) 32,952 42,521 2,614 (2,554) 42,581 (15,000) Capital Expenditures 10,000 2,000 2,500 4,000 5,000 5,500 6,000 Free Cash Flow (25,000) (15,750) (14,156) (1,262) 18,052 27,452 36,581 Beginning Cash Ending Cash (25,000) (40,750) (40,750) (54,906) (54,906) (56,168) (56,168) (38,116) (38,116) (10,664) (10,664) 25,918 (25,000)