Exam questions Essay Example | Topics and Well Written Essays - 5000 words - 1

Exam questions - Essay Example The Discounted Cash Flow ("DCF") technique is the most commonly used valuation method that accounts for the "going-concern" value of the Company. The cash flow projections are derived from (a) assumed revenue generation on product sales, less (b) operating costs and debt repayment on capital investments (not including interest payments), plus (c) an estimate of the Company's residual value at the end of the 3 to 5 year period. These projections are then discounted back to the present by the risk-adjusted, weighted-average cost of capital. This cost of capital accounts for interest payments and/or equity returns expected by investors in the Company over the projection period. Venture Capital Valuation Techniques Sophisticated investors such as VCs, institutional investors and corporate investors generally begin the valuation analysis by examining management's cash flow projections to test the underlying assumptions and business model. Once the investor has developed a certain comfort level in the projections, a variety of techniques are used to determine the percentage ownership the investor will require. Each of these methods start with the management's projections under the DCF technique, but ignore management's application of its assumed discount rate to the present in order to value the Company. Instead, the VC investor imposes its own ROI, as indicated in each of the methods described below - to meet its own investment parameters irrespective of management's analysis of the cost of capital. By applying its own ROI, the investor can then determine the percentage ownership it will require to reach this ROI assuming a certain market valuation for the Company. Where these VC valuation methods differ from the DCF method is in (a) the difference...Once the investor has developed a certain comfort level in the projections, a variety of techniques are used to determine the percentage ownership the investor will require. Each of these methods start with the management's projections under the DCF technique, but ignore management's application of its assumed discount rate to the present in order to value the Company. Instead, the VC investor imposes its own ROI, as indicated in each of the methods described below - to meet its own investment parameters irrespective of management's analysis of the cost of capital. By applying its own ROI, the investor can then determine the percentage ownership it will require to reach this ROI assuming a certain market valuation for the Company. Where these VC valuation methods differ from the DCF method is in (a) the difference in the discount rate, or ROI applied by the Company and by the investor, and (b) the use all VC methods employ of P/E ratios to determine market valuation of the Company at the end of the projection period (equivalent to the methods used under the DCF technique