Pre-money / Post-money Valuation

Water Cooler Investing
#1

Hi Guys,

I had a small issue at work (private equity deal) and thought why not go back to analystforum to talk to my fellow CFA crowd!

My boss told me something like this:

“I expect company X to make $1.5m net profit and have told them that $10 m equity can be raise based upon $25m valuation at 16PE so 40% dilution”

Now my observations:

Case 1: If he meant $25m as pre-money valuation, then, post-money valuation is $35m. My net worth which was $25mn before the transaction, shrinks to 60% of $35m = $21m (This DOES NOT make sense)

Case 2: If he meant $25m as post-money valuation, then, pre-money valuation is $15m. My net worth which was $15mn before the transaction, stays the same at 60% of $25m = $15m (This MAKES sense)

Now assuming case two is correct, the PE ratio should be 15/1.5=10x and not 16x!

Am I missing something here!

#2

Clearly it’s case 2, if he’s correct about the 40% dilution.

A P/E of 16 is incorrect in either case.

I’d ask him how he got his numbers.

#3

I think,

since the earnings is expected, maybe he indicated that future/post valuation as well. So,

PE= Post/expected earnings = 25/1.5 = 16.6

New ownership of the existing owner = 15/25 =60%, so a 40% dilution.

Hence, I’m thinking 15M pre and 25M post. But certainly better to confirm than guess like this.