I’m valuing the shares of a company for a potential capital increase through a private placement. im valuing using both DCF & multiples methods for the purpose of valuing the new shares to be issued and sold through the private placement.
Using multiples (P/E for example):
Before Private Placement: Net income 2012 = $10,000, # of Shares outstanding, 1,000 shares (EPS= $10)
After Private Placement: Net income 2012 = $11,000, # of Shares outstanding, 1,500 shares (EPS= $7.3)
Q1: For the purpose of valuing the new shares to be issued and sold through the private placement, and assuming an industry multiple of 8.0x earnings, do I use EPS after the capital increase or EPS before?
Using DCF:
Q2: for the purpose of valuing the new shares to be issued and sold through the private placement, do I use the financial model post equity injection (factoring the new investing and expansions) or pre the equity injection?
Value should be based on pre-money metrics. If you value based on post-money, you’re effectively making the investor pay for what he’s bringing to the table.
It’s been awhile since I did any modeling, but you definitely want to take the equity injection into account in your models. Equity investors are paying for a proportion of cash flows. Also, you can’t sell the shares at the pre-money price without taking dilution into account. You also need to factor in whether this is a recap to delever (lowers interest tax shield and alters wacc) or whether this is an injection to expand the company in which case you need to determine expected return and cash flows off the expanded business model or new business line or whatever’s going on. Edit: Higgimond may be right, I could be totally off base here, it’s been awhile.
Thank you Higgimond & Black Swan. Im leaning towards the opinion of pre-money valuation. if you take the extreim and assume that the capital increase is for example 500% (five times the current capital), it becomes apparent that the premium created by the new investments, that are not in place currently, will bring most of the value in the post-money valuation therefore making the case for not using it.