How to calculate the enterprise value?, business and finance assignment help
Venture Capital Limited (VCL) proposes to invest an amount “$X” today in a cloud-based accounting software company. In exchange the VCL will receive a 49% interest in the company. Assume the company will have no debt and issue no other securities other than ordinary shares. The cash provided by the VC will be paid to the company in exchange for the issue of new ordinary shares. There will be no cash inflow returns to VCL or any other shareholder, other than when exit is expected to take place.
VCL has or expects:
• An Exit (horizon) time equal to three years.
• Required return = 30% per annum.
• At the end of three years the business is expected to earn earnings before interest and tax, (‘EBIT’) of $10 million.
• Shares in comparable, more established accounting technology companies currently sell at around twenty times EBIT.
In answering the following questions, state any other specific assumptions you may need to make.
a) Calculate the expected business or enterprise value at the end of three years.
