Reference no: EM132163701

Quantitative Sample Questions -

Question 1 - Stack is a privately held programming company that is developing software for functional programming. After a period of strong growth, it has revenues of $25m and EBITDA of $2.5m. After some internal discussions they decide to find a VC to provide growth capital and are wondering about what valuation they could reach. Stack has not raised any external debt or equity to date.

You are part of the business development team and the founders have asked you to do some initial calculations to help them with negotiations. You look at some firms listed on the NASDAQ and find one which is similar to Stack.

This firm has a beta of 1.8, a EV/EBITDA multiple of 12x, a debt to equity ratio of 1/5, and the effective tax rate is 20%.

The risk free rate is 3%, the expected market risk premium is 5%.

1. One of the founders remembers something called a discount rate back in business school. They ask you to calculate it so they can compare it against what a VC might say. What is the discount rate given existing information?

2. The same founder asks you to value Stack using the comparable firm method. What should it be?

3. Another founder remembers that a liquidity discount might be used by the VC when valuing Stack. After some discussion the founders feel that given their size and profitability a discount of 15% is reasonable. Calculate the share price using the comparable method with the liquidity discount, assuming that there are currently 1,000,000 shares outstanding.

4. You ask the founders how much capital should be raised as part of the deal. Currently you have a budgeted shortfall of $3m that would be ideally financed by the VCs. Given this, calculate the pre and post money share price using the comparable method with liquidity adjustments, plus how much ownership will be sold as part of the transaction (% and number of shares). 

Question 2 - Get Hired is an early stage technology company that helps company hire employees through a platform that connects existing job websites and services into one service. It is currently unprofitable, but is expected to generate $25m of net income in 4 years.

You do some analysis and find that there are comparable firms listed on the ASX:

The tax rate is currently 30%. The risk-free rate is 3% while the expected market risk premium is 5%.

Your fund plans to invest $10m into this startup. The GPs feel that early stage firms are riskier than listed firms and has a policy of adjusting for risk through a liquidity discount of 30%.

1. Calculate a discount rate for Get Hired using the average of comparable firms.

2. With the information provided, calculate the pre and post money valuation of Get Hired. How much ownership is the fund targeting post transaction?

3. As the first equity investor in the startup, your GPs worry that future rounds and option pools will affect their returns and future ownership. If they estimate that approximately 40% more equity will be issued, calculate what the new share price should be to get their target ownership if there are currently 5,000,000 shares outstanding.

Question 3 - Specific Magic is a growing technology firm focusing on software and hardware solutions for the future. It has managed to hire employees from large software firms and has currently come up with a method of renting items using smart pods delivered via Uber. It forecasts that it will be cash flow positive in 3 years time, with EBITDA of $100m in year 5.

As a VC analyst you have been asked by the lead partner to work on the deal and you find some comparable firms in the US market:

The tax rate is currently 30%. The risk-free rate is 3% while the expected market risk premium is 5%.

Your VC fund plans to invest $25m into this startup. The GPs feel that early stage firms are riskier than listed firms and has a policy of adjusting for risk through a liquidity discount of 30%.

1. Calculate a discount rate for Specific Magic using the average of comparable firms. You believe that the company will be able to support a D/E ratio of 1/4 and will have a cost of debt of 5%.

2. What is the value of the equity using the VC method if the target rate is 25%?

3. What is the value of the firm if the free cash flows are equal to the EBITDA and will grow at 2% in perpetuity with no debt?