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Small Business Finance…. Spring 2010 URG MBA Program Chapters 9-11. Valuation of Companies. Principles Using the Earnings Ratio – Price to Earnings P/E Examples? Text 1/40, Darlene one to 4 or5 Lodging industry Pitfalls? If the industry standard is not already set??? Incorrect valuation

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small business finance

Small Business Finance…

Spring 2010

URG MBA Program

Chapters 9-11

valuation of companies
Valuation of Companies
  • Principles
  • Using the Earnings Ratio – Price to Earnings P/E
    • Examples?
    • Text 1/40, Darlene one to 4 or5 Lodging industry
  • Pitfalls?
    • If the industry standard is not already set???
    • Incorrect valuation
  • Determining Market value – Like appraising realestate
    • Determine parameters
    • Allowing for Risk
    • Multiple comparisons
customary multiples
Customary Multiples
  • Based on Net Earnings
  • EBIT based multiple
  • Book Value
  • Other Options
    • Revenue multiples
    • Other comparable companies
cash flows and residual income
Cash Flows and Residual Income
  • Capital is weighted according to market value
  • Estimating value for projected periods.
  • According to discounted residual Income
  • Real Options method
    • Pricing Real options from
      • Options to switch
      • Options to abandon
      • Options to delay
      • Options to scope and scale
      • Options to stage
investor value
Investor Value
  • Strategic value is sometimes inflated
  • VC Discount Rate
    • Usually higher—why?
    • Usually lowers as company matures—why?
  • Issuing Stock
    • Price per share
    • Number of stocks issued, based on what?
  • Employee stock options – Advantages?
venture capital method
Venture Capital Method
  • Stage 1: Analyze and Identify the Type and Time of Exit
  • Stage 2: Estimate Terminal Value (TV)
  • Stage 3: Determine the Discount Rate (r)
  • See Mini Case Study: Medica – Stage 3
      • Page 185/6Stage 3: Determine the Discount Rate ®
  • Stage 4: Estimate Additional Required Investment
  • Stage 5: Calculate the Range of Values for Investment
terms of measurement
Terms of Measurement
  • NPV (Net present value)
  • PV (Present Value)
  • Rate of Return
venture capital funds
Venture Capital Funds
  • Venture Capital Funds
    • The massing of funds to be used in up-start company funding
  • Leveraged buyout and merchant banking funds
    • Acquiring funds of companies, all or most, in financial distress
  • Hedge funds
    • Funds that attempt to minimize risk and thus generate less profit
venture capital investors profile
Venture Capital Investors Profile
  • Intermediaries between investors and companies
  • They are an alternative to trading in the stock market with proven companies
  • Specific services are provided to ensure good returns
    • Money
    • Financial Backing
    • Creditability
    • Connections to other financing
    • Strategic connections
    • Help with recruiting management
    • Managerial and operating knowhow
    • Business model assistance
    • Contributing board of directors
vc oversite
VC Oversite
  • Investing in several “rounds”/controlled investing
  • Syndication – in conjunction with other investments
  • Ongoing control – can be an issue
  • Compensation of entrepreneurs and managers
  • Geographic preferences
vc development
VC Development
  • 1980’s
  • 1990’s
  • 2000’s
  • Today????
  • Future????
global market impact
Global Market Impact
  • Speed of communication
  • Speed of banking
  • Differing taxation from global perspective
exit and return of vc funds
Exit and Return of VC Funds
  • Industry is volatile – Why?
  • Different years of origin yield differing results
  • Appear to be good but are they?
other investor options
Other Investor Options
  • Angles/Private Investors
  • Companies within the field
  • Corporate in-house companies
  • Incubators
  • Investment Banks
  • Holding Companies
  • Pension Funds (PERA)
  • Insurance Companies
  • Not-for-Profits
  • Mutual Funds
  • Credit Companies
  • Leasing