Summer 2009 URG MBA Program Chapters 9-11

Valuation of Companies Principles Using the Earnings Ratio – Price to Earnings P/E Examples? Text 1/40, Darlene one to 4 or5 Lodging industry Pitfalls? If the industry standard is not already set??? Incorrect valuation Determining Market value – Like appraising realestate Determine parameters Allowing for Risk Multiple comparisons

Customary Multiples Based on Net Earnings EBIT based multiple Book Value Other Options Revenue multiples Other comparable companies

Cash Flows and Residual Income Capital is weighted according to market value Estimating value for projected periods. According to discounted residual Income Real Options method Pricing Real options from Options to switch Options to abandon Options to delay Options to scope and scale Options to stage

Investor Value Strategic value is sometimes inflated VC Discount Rate Usually higher—why? Usually lowers as company matures—why? Issuing Stock Price per share Number of stocks issued, based on what? Employee stock options – Advantages?

Venture Capital Method Stage 1: Analyze and Identify the Type and Time of Exit Stage 2: Estimate Terminal Value (TV) Stage 3: Determine the Discount Rate (r) See Mini Case Study: Medica – Stage 3 Page 185/6Stage 3: Determine the Discount Rate ® Stage 4: Estimate Additional Required Investment Stage 5: Calculate the Range of Values for Investment

Terms of Measurement NPV (Net present value) PV (Present Value) Rate of Return

Venture Capital Funds The massing of funds to be used in up-start company funding Leveraged buyout and merchant banking funds Acquiring funds of companies, all or most, in financial distress Hedge funds Funds that attempt to minimize risk and thus generate less profit

Venture Capital Investors Profile Intermediaries between investors and companies They are an alternative to trading in the stock market with proven companies Specific services are provided to ensure good returns Money Financial Backing Creditability Connections to other financing Strategic connections Help with recruiting management Managerial and operating knowhow Business model assistance Contributing board of directors

VC Oversite Investing in several “rounds”/controlled investing Syndication – in conjunction with other investments Ongoing control – can be an issue Compensation of entrepreneurs and managers Geographic preferences

VC Development 1980’s 1990’s 2000’s Today???? Future????

Global Market Impact Speed of communication Speed of banking Differing taxation from global perspective

Exit and Return of VC Funds Industry is volatile – Why? Different years of origin yield differing results Appear to be good but are they?

Other Investor Options Angles/Private Investors Companies within the field Corporate in-house companies Incubators Investment Banks Holding Companies Pension Funds (PERA) Insurance Companies Not-for-Profits Mutual Funds Credit Companies Leasing