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This chapter explain why it is important to look to the future when determining a venture’s value, describe how the time pattern of cash flows relates to venture value, understand the need to consider both forecast period and terminal value cash flows when determining a venture’s value, understand the difference between required cash and surplus cash,. | Chapter 9 VALUING EARLY-STAGE VENTURES 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher Chapter 9: Learning Objectives Explain why it is important to look to the future when determining a venture’s value Describe how the time pattern of cash flows relates to venture value Understand the need to consider both forecast period and terminal value cash flows when determining a venture’s value Understand the difference between required cash and surplus cash Describe the process for developing the projected financial statements used in a valuation Describe how pseudo dividends are incorporated into the discounted cash flow equity valuation method Understand the differences between accounting and equity valuation cash flow 2 What is a Venture Theoretically Worth? Present value (PV): value today of all future cash flows discounted to the present at the investor’s required rate of return “Investors pay for the future; entrepreneurs pay for the past.” “If you’re . | Chapter 9 VALUING EARLY-STAGE VENTURES 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher Chapter 9: Learning Objectives Explain why it is important to look to the future when determining a venture’s value Describe how the time pattern of cash flows relates to venture value Understand the need to consider both forecast period and terminal value cash flows when determining a venture’s value Understand the difference between required cash and surplus cash Describe the process for developing the projected financial statements used in a valuation Describe how pseudo dividends are incorporated into the discounted cash flow equity valuation method Understand the differences between accounting and equity valuation cash flow 2 What is a Venture Theoretically Worth? Present value (PV): value today of all future cash flows discounted to the present at the investor’s required rate of return “Investors pay for the future; entrepreneurs pay for the past.” “If you’re not using estimates, you’re not doing a valuation.” 3 Basic Mechanics Of Valuation Discounted cash flow (DCF): valuation approach involving discounting future cash flows for risk and delay Explicit forecast period: two- to ten-year period in which the venture’s financial statements are explicitly forecast Terminal (or horizon) value: value of the venture at the end of the explicit forecast period Stepping stone year: first year after the explicit forecast period 4 Divide and Conquer: Terminal 5 Brewpub Example: 6 Useful Terms Capitalization (cap) Rate: spread between the discount rate and the growth rate of cash flow in terminal value period (r – g) Reversion value: present value of the terminal value Pre-Money Valuation: present value of a venture prior to a new money investment Post-Money Valuation: pre-money valuation of a venture plus money injected by new investors 7 More Useful Terms Net Present Value (NPV): present value of a set of future flows plus the current undiscounted .
