I’m having trouble remembering this method for some reason. Any advice? I haven’t come across too many samples.
in terms of calcing ownership and per share values? i think these are the key things to remember: pre-money value = value of firm discounted appropriately post money value of company = pre-money value + invested from investor Inv % = invested / total post-money value of company then, to calc price per share, you have to find the total shares given to the VC for their investment: use Inv % from above = investor shares / (shares held by mgmt + investor shares), solve for investor shares. price/share = $ invested/investor shares.
Anyone mind posting a problem that asks for a venture cap method calc? Didn’t come across any in the Schweser exams.
I believe it’s a new concept this year, so not surprising that it’s not in the exams. Simple example (literally just tossed it together so if anyone sees an error, let me know) A firm believes it can be sold for $50mm in 5 years. Mgmt needs $7mm now. Mgmt wants to hold 2,000,000 shares. The discount rate proposed is 20%, but you believe there is a 20% chance of failure. 1) Discount rate = .2/(1-.2) = 25% 2) If firm is worth $50mm in 5 years, then present value = (50/(1.25^5)) = $16.384mm Post = $16.384. This is how much has been invested AFTER you consider your $7mm Pre = $16.4 (rounding) - $7 = $9.4mm. This is the amt of mgmt’s stake. Mgmt’s fractional ownership is 57.4%. This is the amount of their stake (the $9.4) divided by the post value (so 9.4/16.4 = 57.4). Your stake is 1-.574 = 42.6%. If mgmt wants to hold 2,000,000 shares (which is totally arbitrary… they could pick any number they like), you need to do a little algebra to see “2,000,000 is 57.4% of X?” The answer is 3,484,320… which is 2,000,000 divided by their fractional share. If mgmt has 2,000,000 shares, you have 3,484,320 - 2,000,000 shares, which is 1,484,320. As for share price, if the post value = 16,400,000… then price/share = 16,400,000/3,484,320 = $5.71
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Ok, read over your example. Seems pretty straight forward, thanks for posting. As far as I can tell, the only possible calculation problems for alternative asset valuation is this venture capital method and real estate valuation. Is there someone else I’m missing there?
You have all of the real-estate valuation methodologies – including the capitalization rates. There’s also the calculation of NOIC and the painful topic of depreciation recapture for tax purposes on your exit value. Don’t forget the general concepts on real-estate and hedge funds that could be tested (e.g. Who would invest in a warehouse versus an apartment building)
Your bankruptcy risk formula is wrong my friend… (1+r)/(1-w)
Correction: Discount rate = ( r+p)/(1-p) = 50% VC fraction = $7M/$6.58M=106%…that’s no good.
mcf Wrote: ------------------------------------------------------- > I believe it’s a new concept this year, so not > surprising that it’s not in the exams. > > Simple example (literally just tossed it together > so if anyone sees an error, let me know) > > A firm believes it can be sold for $50mm in 5 > years. Mgmt needs $7mm now. Mgmt wants to hold > 2,000,000 shares. > > 1) Discount rate = 25% > > 2) If firm is worth $50mm in 5 years, then present > value = (50/(1.25^5)) = $16.384mm > > Post = $16.384. This is how much has been > invested AFTER you consider your $7mm > Pre = $16.4 (rounding) - $7 = $9.4mm. This is the > amt of mgmt’s stake. > > Mgmt’s fractional ownership is 57.4%. This is the > amount of their stake (the $9.4) divided by the > post value (so 9.4/16.4 = 57.4). > > Your stake is 1-.574 = 42.6%. > > If mgmt wants to hold 2,000,000 shares (which is > totally arbitrary… they could pick any number > they like), you need to do a little algebra to see > “2,000,000 is 57.4% of X?” > > The answer is 3,484,320… which is 2,000,000 > divided by their fractional share. > > If mgmt has 2,000,000 shares, you have 3,484,320 - > 2,000,000 shares, which is 1,484,320. > > As for share price, if the post value = > 16,400,000… then price/share = > 16,400,000/3,484,320 = $5.71