You have been asked to value LoraLee enterprises, a privately held restaurant chain that is
expected to make an initial public offering in five years. You have been provided with the
following information:
• The firm generated after-tax operating income of $ 10 million on revenues of $100 million in
the most recent year.
• The firm is all equity funded, with all equity held by venture capitalists, and the book value of
equity at the start of the most recent year was $ 50 million.
• The unlevered beta for publicly traded firms in the sector is 1.00; the correlation of correlation
of the venture capitalists' portfolios with the market is 80%.
• The riskfree rate is 3% and the equity risk premium is 5%
a. If you expect that after-tax operating income will grow 10% a year for the next 5 years and
that the firm will maintain its current return on capital, estimate the expected cash flows each
year for the next 5 years.
b. At the end of year 5, the firm plans to go public. It plans to remain all equity funded and the
return on capital will be 12% in perpetuity, after year 5. If the firm will be in stable growth,
growing 3% a year after year 5, estimate the value at the end of year 5.
c. Estimate the value of the Firm to venture capitalist.