1. You are trying to price a Enterprise Technologies, a start-up and have the following projections (in millions) for th

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1. You are trying to price a Enterprise Technologies, a
start-up and have the following projections (in millions) for the
next five years:
1
2
3
4
5
Revenues
$20.00
$65.00
$115.00
$265.00
$550.00
EBITDA
$(25.00)
$(45.00)
$(55.00)
$(25.00)
$110.00
Tax Rate
0%
0%
0%
0%
30%
FCFF
$(50.00)
$(115.00)
$(155.00)
$(85.00)
$(15.00)
Cost of capital
11%
11%
11%
11%
11%
You have run a regression of EV/EBITDA against tax rate and
EBITDA margin (EBITDA/Sales) for more established firms in the
business and have the following:
EV/EBITDA = 8.00 + 100.00 (EBITDA Margin) – 10.00 (Tax
Rate)
[All numbers in the regression are entered in decimals, i.e., 20%
is 0.20]
a. If the cost of capital is 11% and you have $50 million of net
debt outstanding today,
estimate what you would pay for equity today, based upon your
expected pricing in year 5
and incorporating the effect of cash flows for the next five
years.
b. The negative cash flows that are forecast for the next five
years are called “cash burn” and
will require fresh capital to be raised. Assuming that the company
plans to issue only
equity to meet these needs, estimate how much of a discount you are
already applying to
your equity value (in part a) to reflect this dilution?
c. Now assume that there is a chance that capital markets will
freeze up, making it impossible
to raise capital and that the probabilities of that happening, by
year, are below:
Year
1
2
3
4
5
Probability of Capital Freeze
20%
15%
10%
5%
5%
Estimate the value of equity with this probability considered,
assuming that if capital is
unavailable, the business will have to shut down and equity will be
worth nothing.