1

1 2
FFCF 1,100,000.00 1,250,000.00
Interest Bearing debt 10,000,000.00 20,000,000.00
a
PV of FCF 1,004,566.21 1,042,513.71
PV of planning unlevered CF 4,045,812.65
b
Interest Bearing debt 10,000,000.00 20,000,000.00
Interest Expense 650,000.00 1,300,000.00
Tax Saving 162,500.00 325,000.00
PV of tax saving 152,582.16 286,539.27
PV of planning interest tax saving 893,539.65

c
PV of EBITDA multiple 52,168,072

d
Enterprise value 57,107,424

Equity value 27,107,424

2 0 1 2
EBITDA 6.5 4.5
Capex 7.5
Depreciation 2.5 2.5
EBIT 4 2
35% Tax 1.4 0.7
NOPAT 2.6 1.3
+ Depreciation 2.5 2.5
- Change NWC 0 0 0
- Capex 7.5 0 0
FCFF -7.5 5.1 3.8
PV -7.5 4.513 2.976
NPV 2.17233974427835

b
Method 1: EVA = NOPAT - Capital cost = NOPAT - invested capital (t-1)*cost of equity
Invested capital(t) = Invested capital (t-1) + capex - depreciation + Change in NWC
 Method 1 0 1 2
Invested capital 7.5 5 2.5
Change in NWC 0 0 0
Depreciation 0 2.5 2.5
Capex 7.5 0 0

EVA 1.625 0.65

PV 1.43805309734513 0.50904534419297
PV of EVA 2.17233974427835

Method 2: EVA = Invested capital (t-1) *(ROIC - WACC) = Invested capital (t-1) * (NO
Invested capital 7.5 5 2.5
ROIC 0.34666666666667 0.26
WACC 0.13 0.13 0.13
EVA 1.625 0.65
PV 1.43805309734513 0.50904534419297
PV of EVA 2.17233974427835

c
NOPAT 2.6 1.3
Depreciation 0 2.5 2.5
Capex 7.5 0 0
Change in NWC 0.375 0.26875
Invested capital 7.5 5.375 3.14375

EVA 1.625 0.60125

FCFF -7.5 4.725 3.53125

3
a
EV in year 7 19,073,486.33
b
Investment meets the required rate of return in year 7
9433526.10648437
Fraction of ownership 49.46%

c Hope for return 40%

0 1 2 3
DIV PAY 56000 56000 56000
 40000 28571.4285714286 20408.1632653061
126718.969137009

Prefered share convert 6043156.224

4 2020
Revenue 2,243,155.00
COGS 1,458,051.00
Depreciation and ad 574,316.00
EBIT 210,788.00
Depreciation 50,000.00
EBITDA 260,788.00

EV value 1,043,152.00

b
EBITDA 260,788.00
Ad expense saving 20000
Increase 70,000 70000
Increase by reduce 10% COGS 145,805.10

New EBITDA 496,593.10

New EV value 2,234,668.95

5
Unlevered cost of equity 9.50%
Borrowing rate 6.50%
Tax rate 35%

Years
1 2 3 4
FCFF 110 120 130 130
Interest bearing tax 150 100 50

a
1 2 3
 FCFF 110 120 130
PV 100.4566210046 100.081316069306 99.0150006773959
PV of Unlevered Cash flow 299.552937751268

b
Interest bearing tax 150 100 50
Interest Expense 9.75 6.5 3.25
Tax saving 3.4125 2.275 1.1375
PV 3.204225352113 2.00577486830214 0.94167834192589
PV of tax saving 6.15167856234071
c
Terminal value at year 4 1368.42105263158
PV of terminal value 1042.26316502522

d
EV with APV approach 1,347.97

e
Equity value = Enterprise value - Debt + Cash

EV with APV approa 1,347.97

Debt 150.00
Cash -

Equity 1,197.97
 3 4 Cost of equity 9.50%
1,300,000.00 1,450,000.00 Borrowing rate 6.50%
15,000,000.00 20,000,000.00 Tax rate 25%
EBITDA (year 5) 15,000,000
990,150.01 1,008,582.73 Debt outstanding 30,000,000

15,000,000.00 20,000,000.00
975,000.00 1,300,000.00
243,750.00 325,000.00
201,788.22 252,630.00

3
3.5 Cost equity 13%

2.5
1
0.35
0.65
2.5
0
0
3.15
2.183

apital (t-1)*cost of equity

on + Change in NWC
 3
0
0
2.5
0

0.325
0.22524130274025

vested capital (t-1) * (NOPAT/Invested capital (t-1) - WACC)

0
0.26
0.13
0.325
0.22524130274025

0.65
2.5
0
-0.64375
0

0.2413125
3.79375

4 5 6 7
56000 56000 56000 56000
14577.2594752187 10412.3281965848 7437.377283275 5312.412345196

4
130
 1 0
EBITDA
Capex 6,000,000.00
Depreciation
EBIT
28% Tax
NOPAT
Invested Capital 6,000,000.00
Change in NWC
FCFF (6,000,000.00)
PV 6,000,000.00
Cost of capital 10%
NPV $19,552,705.42
Invested capital (t) = Invested capital (t-1) -Depreciation + Change in NWC
B EVA = NOPAT- cost of capital * invested capital

EVA EVA

2
Revenue 3600000
COGS 2340000
Gross profit 1260000
Operating costs 910000
Depreciation cost 50,000
EBITDA 350000

EV $ 1,225,000.00

b
EBITDA $ 350,000.00
Increase 80,000 $ 80,000.00
Save 30000 $ 30,000.00
COGS $ 280,800.00
New EBITDA $ 740,800.00

New EV $ 2,592,800.00

Borrowing rate 8.50%

3 Rate 10.50%
a) value of unlevered firm 0 1
FFCF $ 1,000,000.00
Interest Bearing $ 500,000.00
PV $ 904,977.38
PV of CF $ 3,671,341.20
PV of terminal value 8943131.66162987

Value of unlevered 12614472.8625528

b 0 1
Interest Bearing $ 500,000.00
Interest Expense 8.5% $ 42,500.00
Tax Saving 30% $ 12,750.00
PV $ 11,751.15
PV $ 533,951.83

C
Value levered firm $ 13,148,424.69

D
EV = Equity + Debt - Cash

Equity $ 11,648,424.69

4
 1 2 3 4
4,300,000.00 5,100,000.00 5,900,000.00 6,700,000.00

1,500,000.00 1,500,000.00 1,500,000.00 1,500,000.00

2,800,000.00 3,600,000.00 4,400,000.00 5,200,000.00
784,000.00 1,008,000.00 1,232,000.00 1,456,000.00
2,016,000.00 2,592,000.00 3,168,000.00 3,744,000.00
4,800,000.00 3,540,000.00 2,217,000.00 -
300,000.00 240,000.00 177,000.00 (717,000.00)
3,216,000.00 3,852,000.00 4,491,000.00 5,961,000.00
2,923,636.36 3,183,471.07 3,374,154.77 4,071,443.21

ciation + Change in NWC

1,416,000.00 2,112,000.00 2,814,000.00 3,522,300.00

EV multiples 3.5

2 3 4 5
$ 1,100,000.00 $ 1,250,000.00 $ 1,400,000.00 1400000
$ 1,500,000.00 $ 1,000,000.00 $ 2,000,000.00
$ 900,882.46 $ 926,452.55 $ 939,028.82

2 3 4 5
$ 1,500,000.00 $ 1,000,000.00 $ 2,000,000.00
$ 127,500.00 $ 85,000.00 $ 170,000.00
$ 38,250.00 $ 25,500.00 $ 51,000.00
$ 32,491.66 $ 19,964.16 $ 36,800.29
 1 0 1
EBITDA 480,000.00
Capex 720,000.00
Depreciation 180,000.00

EBIT 300,000.00
25% Tax 75,000.00

NOPAT 225,000.00
Depreciation 180,000.00
Capex 720,000.00
Change NWC 0 72,000.00
Invested capital 720,000.00 612,000.00
FCFF (720,000.00) 333,000.00
PV of FCFF (720,000.00) 297,321.43
NPV 663,671.15

b
EVA 0 1
Method 1: EVA = NOPAT - Cost of capital = NOPAT - Invested capital (t-1) * co

NOPAT 225,000.00
Invested capital 720,000.00 612,000.00

EVA 138,600.00

Method 2: EVA = Invested capital (t-1) * ( ROIC - WACC)

ROIC = NOPAT/ Invested capital (t-1)

NOPAT 225,000.00
Invested capital 720,000.00 612,000.00
ROIC 0.31

EVA 138,600.00

2
Revenue 2,400,000.00
COGS 1,200,000.00
Variable op cost 192,000.00
Fixed 350,000.00
Depreciaton 40,000.00

Gross profit 1,200,000.00

 EBIT 618,000.00
EBITDA 658,000.00

a
EV value 2,632,000.00

c
Adjustment to EBITDA Administrative cost saving
Increase EBITDA 60000
Reduce COGS 8%

EBITDA
Ajusted EBITDA
Ajusted EV value 3,753,000.00

3
1 2
FFCF 1,200,000.00 1,350,000.00
Interest bearing debt 1,000,000.00 1,500,000.00

Cost of equity 9.50%

Borrowing rate 6.50%
Tax rate 25%
Debt outsatnding 1,000,000.00
EBITDA year 4 1,500,000.00
EBITDA multiple 5 times

a. Unlevered firm value

1.00 2.00
FFCF 1,200,000.00 1,350,000.00
PV of FFCF 1,095,890.41 1,125,914.81
PV of Unlevered CF 4,581,541.01
Terminal value 18,421,052.63
PV of terminal 12,813,210.67

Value of unlevered 17,394,751.68

b. value of firm's interest tax saving

1 2
Interest bearing debt 1,000,000.00 1,500,000.00
Interest expense 65,000.00 97,500.00
Interest tax saving 16,250.00 24,375.00
Pv of interest tax saving 15,258.22 21,490.45
PV of interest tax saving from 5 and beyond
Value of interest tax 749,097.17

c.
Value of levered firm 18,143,848.84

d.
Equity 17,143,848.84

4
0 1
EBITDA
 2 3 4
540,000.00 600,000.00 660,000.00 Cost of capital
12%
180,000.00 180,000.00 180,000.00

360,000.00 420,000.00 480,000.00 Invested capital = Invested cap (t-1)

90,000.00 105,000.00 120,000.00

270,000.00 315,000.00 360,000.00

180,000.00 180,000.00 180,000.00

61,200.00 49,320.00 (182,520.00)

493,200.00 362,520.00 -
388,800.00 445,680.00 722,520.00 -
309,948.98 317,226.22 459,174.52

2 3 4
PAT - Invested capital (t-1) * cost of equity

270,000.00 315,000.00 360,000.00

493,200.00 362,520.00 -

196,560.00 255,816.00 316,497.60

270,000.00 315,000.00 360,000.00

493,200.00 362,520.00 -
0.44 0.64 0.99

196,560.00 255,816.00 316,497.60

EV multiple 4
New EV multiple 4.5
istrative cost saving 20000
se EBITDA 60000 60000
e COGS 8% 96,000.00

658,000.00
ed EBITDA 834,000.00

3 4 and beyond
1,500,000.00 1,750,000.00
2,000,000.00 1,500,000.00

3.00 4.00 5
1,500,000.00 1,750,000.00 1,750,000.00
1,142,480.78 1,217,255.01

3 4 5
2,000,000.00 1,500,000.00 1,500,000.00
130,000.00 97,500.00 97,500.00
32,500.00 24,375.00 24,375.00
26,905.10 18,947.25 375,000.00
 291,496.16

2 3 4 5
pital = Invested cap (t-1) -depreciation + capex + change in NWC
 Given
Target EBITDA sales multiples 6 times
EBITDA (year 5) 1,200,000.00
Fund needed to raise 500,000.00
Cash ( year 5) 300,000.00
Debt (year 5) 2,000,000.00
Investment horizon for VC 5 years

Deal structures
Rate of return Ownership %
Dividend rate on common share 0% 60%
Coupon (convertible bond) 10% 40%
Dividend rate (convertible pfd) 10% 45%

Solution
a Enterprise valuation

EBITDA x EBITDA Multiple 7,200,000.00

Plus Cash 300,000.00
Enterprise value 7,500,000.00
Less: Interest Bearing Debt 2,000,000.00
Equity value in year 5 5,500,000.00

b Analysis of alternative deal structures

Common stock
Terminal CF (equity ownership) 3,300,000.00
Required return 45.85%
Convertible Bonds, convert 45% ownership of firm's common stock at the end of year 5
Annual interest 50,000.00
$Terminal cash flow 2,200,000.00
Required return 40.67% =

Preferred stock
Annual dividend 50,000.00
Terminal cash flow 2,475,000.00
Required return 43.68% =

c. Analysis of pre and post money values

Common stock
Post money value of the firm's equity 833,333.33
Less: Invested capital 500,000.00
Premoney value 333,333.33
Convertible Bonds, convert 45% ownership of firm's common stock at the end of year 5
Post money value of the firm's equity 1,250,000.00
Less: Invested capital 500,000.00
Premoney value 750,000.00
Preferred stock
Post money value of the firm's equity 1,111,111.11
Less: Invested capital 500,000.00
Premoney value 611,111.11
 Ownership = investment meets required rate of return/EV
investment meets required rate of return = Initial investment *(1+r)^n
investment meets required rate of return

uctures

ck at the end of year 5

values
ck at the end of year 5