FI370 - Venture Capital and Entrepreneurial Finance (2016 Spring)

Example of Questions for the Exam

Prof Gimede Gigante, PhD

Question 1:

Briefly describe the mechanism behind the Private Equity/Venture capital method and indicate the
structural difference between this method and the most traditional valuation methodologies used for
company valuation

Solution:

The problem: you have to decide the price to pay in order to acquire a certain equity stake in an unlisted
firm. Venture capital investments are characterized by extremely high uncertainty and traditional valuation
methods fail to recognize the fair value of a very risky asset. VC method is a way to determine the equity
stake bought and the price per share paid by a financial investor in a company GIVEN his required IRR.
Compared with more traditional company valuation methodologies, it is a subjective method of valuation
that reconciles the values attached to the firm with the required return by a financial investor.

Question 2:

Consider the following case:

Amount of money invested by the PE investor in t0: 3.5 mil euros

Expected net income at t5 (end of the investment period): 2.5 mil euros
P/E = 15x (based on comparables valuation)
Required IRR = 50% per annum
# of outstanding shares at entry: 1 million
Determine the equity stake acquired by the PE investor, the number of acquired shares, the pre-
money and post-money value

Solution (double click on the following table to open the excel file):

Question 3

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 Describe how to address the equity value with a NPV methodology indicating the discount rate that has to
be used in case of availability of Unlevered Cash Flow.

Solution

 The most common DCF approach is the NPV method, where EV is calculated using WACC (weighted
average cost of capital) to discount unlevered cash flow

 The EV is equal to the present value of future unlevered cash flow + the terminal value

 The formula to calculate enterprise value for a mature investment is:

 Where:

 TV is the terminal value of the firm at time n

 SA are surplus (not operating) assets

 M are minorities

 NFP is net financial position

 SA, M, and NFP refer (if they exist) to the time of valuation

 The determination of the terminal value is calculated by:

 Where g is the perpetual growth rate of the cash flow. Usually the range for g is determined in a
range between 0 (no growth) and 5%

Remember :

 The final exam is composed by three questions (two questions regarding

the part of theory and the other question regarding an exercise)
 Total time at your disposal for the three questions will be one hour (60
minutes)

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