1. You are trying to price a Topknot Technologies, a start-up and have the following projections (in millions) for the next five years:
1
2
3
4
5
Revenues
$20.00
$65.00
$115.00
$265.00
$550.00
EBITDA
$(25.00)
$(45.00)
$(55.00)
$(25.00)
$110.00
Tax Rate
0%
0%
0%
0%
30%
FCFF
$(50.00)
$(115.00)
$(155.00)
$(85.00)
$(15.00)
Cost of capital
11%
11%
11%
11%
11%
You have run a regression of EV/EBITDA against tax rate and EBITDA margin (EBITDA/Sales) for more established firms in the business and have the following:
EV/EBITDA = 8.00 + 100.00 (EBITDA Margin) – 10.00 (Tax Rate)
[All numbers in the regression are entered in decimals, i.e., 20% is 0.20]
a. If the cost of capital is 11% and you have $50 million of net debt outstanding today,
estimate what you would pay for equity today, based upon your expected pricing in year 5
and incorporating the effect of cash flows for the next five years.
b. The negative cash flows that are forecast for the next five years are called "cash burn" and
will require fresh capital to be raised. Assuming that the company plans to issue only
equity to meet these needs, estimate how much of a discount you are already applying to
your equity value (in part a) to reflect this dilution?
c. Now assume that there is a chance that capital markets will freeze up, making it impossible
to raise capital and that the probabilities of that happening, by year, are below:
Year
1
2
3
4
5
Probability of Capital Freeze
20%
15%
10%
5%
5%
Estimate the value of equity with this probability considered, assuming that if capital is
unavailable, the business will have to shut down and equity will be worth nothing.
Will give positive rating!! thank you