A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of year 5 when the net income is estimated at $1,600,000. A publicly-traded competitor or "comparable firm" has current earnings of $1,000,000 and a market capitalization value of $10,000,000.
Estimate the value of the new venture at the end of year 5. Estimate the present value of the venture at the end of year 0 if the venture capitalist wants a 40 percent annual rate of return on the investment.
The comparable firm is worth 10 times its earnings. Earnings are expected to be $1.6M at the end of year 5, therefore the firm will be worth $16M ...
The solution estimates the value of the new venture at the end of year 5. The present value of the venture at the end of year 0 is estimated.