1.

Find the enterprise valuation cash flow expected for the current year given the following
information:

  Capital expenditures (CAPEX) = $150,000

Depreciation and amortization expenses = $40,000

Earnings before interest and taxes = $400,000

Effective income tax rate = 30%

                                                                       Last Year                       Current Year

Required cash                                 $50,000                         $75,000

Surplus cash                                      20,000                            40,000

Accounts receivable                      200,000                         250,000

Inventories                                         300,000                         360,000

Accounts payable                           100,000                         120,000

Accrued liabilities                             40,000                           50,000

Bank loan (short-term)                             90,000                         110,000

2. Harvesting Successful Venture

[DCF Valuation and Ownership Concepts] The venture investors and founders of the ACE Products
venture, a closely held corporation, are contemplating merging the successful venture into a much
larger diversified firm that operates in the same industry. ACE estimates its free cash flows that will
be available to the enterprise next year at $5,200,000. Since the venture is now in its maturity stage,
ACE’s free cash flows are expected to continue to grow at a 6 percent annual compound growth rate
in the future. A weighted average cost of capital (WACC) for the venture is estimated at 15 percent.
Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture also has surplus cash of
$4 million. ACE currently has 5 million shares outstanding with 3 million held by venture investors
 and 2 million held by founders. The venture investors have an average investment of $2.50 per share
while the founders’ average investment is $.50 per share.

A.Based on the above information, estimate the enterprise value of ACE Products. What
would be the value of the venture’s equity?

B.How much of the value of ACE would belong to the venture investors versus the founders.
How much would the venture be worth on a per share basis?

C. What would be the percentage appreciation on the stock bought by the venture investors
versus the investment appreciation for the founders?

If the founders have held their investments for five years, calculate their compound annual or internal
rate of return on their investments. The venture investors made a first round investment of 1.5 million
shares at $2 per share four years ago. What was the compound annual rate of return on the first round
investment? Venture investors made a second round investment of 1.5 million shares at $3 per share
two years ago. Calculate their compound rate of return on this investment.