1 Chapter 8 THE CREATION AND CALIBRATION OF VALUE ENTREPRENEURIAL FINANCE

2 Chapter 9: Learning Objectives Explain how the time pattern of cash flows relates to venture value Describe how valuation incorporates projections of near- and long-term success Extract the necessary valuation data from projected financial statements Understand the relationship between dividends and equity valuation cash flow Put the pieces together for a unified treatment of financial projections and valuation

3 What is a Venture Theoretically Worth? 创业价值的理论依据 Present value (PV): value today of all future cash flows discounted to the present at the investor’s required rate of return 现值度量 “Investors pay for the future; entrepreneurs pay for the past.” （投资者对企业的未来投资；创业 者为企业的过去投资） “If you don’t make up the numbers, it’s not a valuation.” （用数值度量创业企业的价值）

4 Basic Mechanics Of Valuation 估价的基本方法 Discounted cash flow (DCF): 贴现现金流 valuation approach involving discounting future cash flows for risk and delay Explicit forecast period: 明确的预测期 two- to ten-year period in which the venture’s financial statements are explicitly forecast Terminal (or horizon) value: 明确预测期的终值 value of the venture at the end of the explicit forecast period Stepping stone year: 明确预测期的第一年 first year after the explicit forecast period

5 Divide and Conquer: Terminal 创业企业的终值计算公式

6 Useful Terms 相关专业术语 Capitalization (cap) Rate: spread between the discount rate and the growth rate of cash flow in terminal value period (r  – g) Reversion value: present value of the terminal value Pre-Money Valuation: present value of a venture prior to a new money investment Post-Money Valuation: pre-money valuation of a venture plus money injected by new investors

7 More Useful Terms 相关专业术语 Net Present Value (NPV): 净现值 present value of a set of future flows plus the current undiscounted flow Required Cash: 维持经营活动所需要的现金 amount of cash needed to cover a venture’s day-to-day operations Surplus Cash: 现金盈余 cash remaining after required cash, all operating expenses, and reinvestments are made

8 Equity Valuation Cash Flows 现金流 的权益价值计算公式 Equity Valuation Cash Flow = Net Income 净收益 + Depreciation and Amortization Expense - Change in Net Operating Working Capital (w/o surplus cash) - Capital Expenditures + Net Debt Issues

9 Equity Valuation Cash Flows 现金流 的权益价值例题 Equity Valuation Cash Flow for PDC Company Net Income$6,372 + Deprec. & Amort. Exp.+4,600 - Change in NOWC (w/o surplus cash)+2,415 - Capital Expenditures- 6,900 + Net Debt Issues- 0 = Equity Valuation Cash Flow$6,487

10 Equity Valuation: Maximum Dividend Method 股利最大化方法 Maximum Dividend Method (MDM): 股利最大化方法 valuation method involving explicitly forecasted dividends to provide surplus cash of zero MDM Value: 股利价值最大化 sum of discounted maximum net dividends (Dividends – Equity Issues)

11 Equity Valuation: Maximum Dividend Method 股利最大化方法 Formally eliminate all cash surpluses by paying them out as dividends Balance sheet will have zero for all surplus cash balances Venture’s equity can be valued directly using Net Dividends (Dividends – Issues) in CF Statement (or by equity VCF method) No excess cash in end

12 MDM Income Statements (Yearly Surplus Cash Paid as Dividends) 股利最大化例题

13 MDM Income Statements (cont’d) 股利最大化例题（损益表）

14 MDM Balance Sheets 股利最大化方法：资产负债表

15 MDM Balance Sheets (cont’d)

16 MDM Statements of Cash Flow

17 MDM Statements of Cash Flow (cont’d)

18 Maximum Dividend Method: (PV of Net Dividends) 股利最大化方法：股利现值法

19 Equity Valuation Cash (Shortcut) Approach 现金的权益价值

20 Pseudo Dividend Method (PDM) 股息方法 PDM: valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash Pseudo dividends, or dividends that could be paid but are retained inside the venture are valued Pseudo dividends do not appear on any projected financial statement

21 Pseudo Dividend Method (PDM) 股息方法 Formally retain all cash surpluses in surplus cash account Project all dividends at zero Value venture’s equity using equity VCF with working capital calculations that omit surplus cash Projected balance sheets indicate surplus cash balances treated by valuation as already paid. Can’t be added to terminal value or stripped out again.

22 PDM Income Statements (All Surplus Cash Retained)

23 PDM Income Statements (cont’d)

24 PDM Balance Sheets

25 PDM Balance Sheets (cont’d)

26 PDM Statements of Cash Flow

27 PDM Statements of Cash Flow (cont’d)

28 PDM’s Shortcut Approach (strip surplus cash from NWC)

29 Delayed Dividend Approximation (DDA) 递延股利方法 Valuation method involving zero dividends in the explicitly forecasted period with initial dividend at the terminal Treats all required & surplus cash as investments in the venture’s working capital and provides same return as cash invested in venture operations Formally retain all cash surpluses on balance sheet & in valuation Pay catch-up dividend in last year of explicit forecasting period and pay all surplus cash thereafter as explicit dividends Value firm by its dividends (or equity VCF)

30 DDA Gives Lower Valuation 递延股利方法 Resulting value will be lower than that found by other approaches due solely to delay in crediting venture for creating surplus cash (which eventually becomes dividend or other flow to equity)

31 DDA Income Statements (first dividend in year 5) 递延股利方法例题

32 DDA Income Statements (Yrs 4 - 6) 递延股利方法例题

33 DDA Income Statements (cont’d) 递延股利方法例题

34 DDA Income Statements (Yrs 4 – 6)

35 DDA Balance Sheets 递延股利方法例题

36 DDA Balance Sheets (Yrs 4 – 6)

37 DDA Balance Sheets (cont’d)

38 DDA Balance Sheets (Yrs 4 – 6)

39 DDA Statements of Cash Flow

40 DDA Statements of Cash Flow (Yrs 4 – 6)

41 DDA Statements of Cash Flow

42 DDA Statements of Cash Flow (Yrs 4 – 6)

43 DDA Method: Dividends or Shortcut with no surplus cash strip!

44 DDA Method: Dividends or Shortcut!